Certified Financial Management Specialist Practice Exam

Which of the following is NOT a form of capital structure?

1. Debt financing

2. Equity financing

3. Tax credit financing

4. Internal financing

The correct answer is: Tax credit financing

In the context of capital structure, which refers to the way a corporation finances its assets through a combination of debt, equity, and internal funds, it's essential to look at the definitions of each option. Debt financing refers to borrowing funds that must be repaid over time, typically through loans or bonds. This is a primary component of a company’s capital structure, as it involves external obligations to creditors. Equity financing involves raising funds by selling shares of the company. This can dilute ownership but does not require repayment, making it another fundamental part of how a company finances its operations and growth. Internal financing, which includes retained earnings or reinvested profits, is also a critical aspect of capital structure, as it utilizes funds generated by the company rather than seeking external sources. Tax credit financing, however, does not constitute a form of capital structure. Instead, tax credits are incentives offered by the government to encourage certain behaviors or investments and do not represent a source of capital for financing a company’s operations or growth in the same way that debt and equity do. Thus, it is not a recognized form of capital structure, leading to its classification as the correct response.