Important Information Businesses finance acquisition of their assets from two sources: funds supplied by creditors (debt) and funds provided by owners (equity). The mixture of debt and equity a business uses is called its capital structure. In addition to selecting a capital structure, management can select from a variety of sources from which to borrow money. What factors do managers consider when they borrow money? Two key factors are risk and cost. From the firm's perspective, debt capital is more risky than equity because payments associated with debt are a company's legal obligations. If a company cannot meet a required debt payment (either principal or interest), creditors may force the company into bankruptcy and require a sale of assets to satisfy the debt. Liabilities are probable debts or obligations that result from past transactions, which will be paid with assets or services. Current liabilities are short-term obligations that will be paid within the current operating cycle or one year,
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