Capital Structure refers to the mix between owners and borrowed funds. Which of the following is the correct formula.

Debt/Equity

The correct answer is Option (1) - Debt/Equity.

The proportion of debt in the overall capital is also called financial leverage. Financial leverage is computed as Debt/Equity or Debt / (D + E) when D is the Debt and E is the Equity. As the financial leverage increases, the cost of funds declines because of increased use of cheaper debt but the financial risk increases.