Differentiate between Pyramid Shaped Capital Structure and Inverted Pyramid Shaped Capital Structure.

Pyramid shaped Capital structure A pyramid shaped capital structure has a large proportion of equity capital and retained earnings which have been ploughed back into the firm over a considerably long period of time. The cost of equity and the retained earnings of the firm is usually lower than the cost of debt. This structure is indicative of risk averse conservative firms. Inverted Pyramid shaped Capital Structure Such a capital structure has a small component of equity capital, reasonable level of retained earnings but an ever increasing component of debt. All the increases in the capital structure in the recent past have been made through debt only. Chances are that the retained earnings of the firm are shrinking due to accumulating losses. Such a capital structure is highly vulnerable to collapse.