Capital structure of a business unit consists of :
Equity, preference and debt capital
Option 4 — Equity, preference and debt capital is correct.
Capital structure is the mix of a firm’s long-term (permanent) sources of finance used to fund its assets. Conventionally it comprises three components: equity share capital (including reserves/retained earnings), preference share capital, and long-term debt (debentures, term loans, bonds). Option 4 lists exactly these three, so it is the most complete and accurate description.
Why the other options are wrong:
| Option | Flaw |
|---|---|
| 1 — Equity + preference only | Omits debt capital, a core element of capital structure. |
| 2 — Equity, long-term debt + short-term loan | Short-term loans are working-capital finance, excluded from capital structure; preference is missing. |
| 3 — Equity + debt only | Correct in spirit but ignores preference capital, so less complete than option 4. |
Note that short-term borrowings belong to the wider “financial structure”, not the capital structure.
Takeaway: capital structure = equity + preference + long-term debt capital; short-term funds are excluded.
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