and retained earnings. In practice, the capital structure may be complex and include other sources of capital. Leverage or capital gearing ratios Financial analysts use some form of leverage ratio to quantify the proportion of debt and equity in a company's capital structure, and to make comparisons between companies. Using figures from the balance sheet, the debt-to-capital ratio can be calculated as shown below. {| class="wikitable" |- | debt-to-capitalization ratio = dollar amount of debt/ dollar amount of total capitalization The debt-to-equity ratio and capital gearing ratio are widely used for the same purpose. {| class="wikitable" |- | capital gearing ratio = dollar amount of capital bearing risk/ dollar amount of capital not bearing risk Capital bearing risk includes debentures (risk is to pay interest) and preference capital (risk to pay dividend at fixed rate). Capital not bearing risk includes equity. Therefore, one can also say, Capital gearing ratio = (Debentures + Preference share capital) : (shareholders' funds) In public utility regulation Capital structure is an important issue in setting rates charged to customers by regulated utilities in the United States. Ratemaking practice in the U.S. holds that rates paid by a utility's customers should be set at a level which assures that the company can provide reliable service at reasonable cost. The cost of capital is among the costs a utility must be allowed to recover from customers, and depends on the company's capital structure. The utility company may choose whatever capital structure it deems appropriate, but regulators determine an appropriate capital structure and cost of capital for ratemaking purposes. Modigliani–Miller theorem The Modigliani–Miller theorem, proposed by Franco Modigliani and Merton Miller in 1958, forms the basis for modern academic thinking on capital structure. It is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure process factors like fluctuations and uncertain situations that may occur in the course of financing a firm. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the