Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
Capital Structure
For a small business, there are two major forms of financing. Debt is when the company borrows money. Debt for small businesses usually comes from a bank, and it often has a fixed schedule of repayments, and there is interest as well. The other form is equity, which is ownership in the business (Parker, 2012). Each has its advantages and disadvantages. Debt is risky, and indeed it increases the risk to the company because the payments must be made. As a result, the payments come from pre-tax earnings before there is money for reinvestment into the company or for disbursement to the shareholders. This obligation represents risk (Harley, 2013). Debt financing has two attractive advantages, however. The first is that it is cheaper than equity financing, and for a small business might be easier to acquire. The second is that debt financing allows for retention of ownership
With equity, a share of ownership is sold. The main advantage of this is that it allows for capital to remain in the company...
This means that equity is the lower-risk of the two. However, by giving up a share in ownership, equity is more costly than debt. The big downside is the loss of equity. This not only costs the entrepreneur future profits but also there the entrepreneur has to be cognizant of losing control of the business, or selling 49% equity too early and backing themselves into a financing corner (Peavler, 2014).
With respect to raising capital, the big thing with an investment banker is that they have to come in at the right time, and they have to add value. Investment bankers are typically better at equity than debt financing, first of all. The reason for this is that debt is typically placed with just a few clients, or comes from a bank. Placing an equity issue and meeting the SEC's criteria for listing is far more complicated. That is a good job for the investment banker. It is not necessarily the case that the cheapest cost investment banker is best -- the objective is to…
References
Harley, K. (2013). The difference between debt and equity financing for your small business. Mint Life. Retrieved February 28, 2014 from https://www.mint.com/blog/consumer-iq/the-difference-between-debt-and-equity-financing-for-your-small-business-0613/
Parker, T. (2012). Small business financing: Debt or equity? Investopedia. Retrieved February 28, 2014 from http://www.investopedia.com/financial-edge/1112/small-business-financing-debt-or-equity.aspx
Peavler, R. (2014). Debt and equity financing. About.com. Retrieved February 28, 2014 from http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
Capital Structure The three companies selected for this report are eBay, Clorox, and Darden Restaurants. eBay is an online auction website, acting as an intermediary between buyers and sellers. Clorox is described as being a manufacturer and marketer of consumer and institutional cleaning and household products. Some of its brands are the eponymous cleaners, Brita water filters, Burt's Bees and a variety of other brands as well. Darden Restaurants operates casual
Capital Structure A company's capital structure is the balance of different methods of financing that provides funding for the company's operations. The basic breakdown is between debt and equity, but preferred shares may also factor into the capital structure. Debt includes all forms of liabilities, including both long-term debt and current liabilities. Equity includes both the book value of shares issued and the company's retained earnings. The market value of the
Capital Structure Decision and Cost of Capital In basic terms, capital structure has got to do with how companies finance their overall operations using various sources of funds. In this text, I recommend what is in my opinion the optimal capital structure for the three companies selected for purposes of this discussion. The companies that will be used for purposes of this discussion are: Alaska Air Group, the Clorox Group, and
Capital Structure Modigliani and Miller argued that capital structure is irrelevant, all other things being equal, but in the real world those other things are never equal. The factors that are ruled out of MM are neutral taxes, no capital market frictions, symmetric access to credit markets, and that firm finance policy reveals no information. Normally, arguments against the irrelevance of capital structure are based on these factors that MM assumed
Capital Structure A project should not be evaluated in terms of capital structure. The financing of a project is a decision that is independent of the decision to undertake a project. This flows from the Modigliani and Miller Theorem where the choice of financing is irrelevant to the returns of the asset, all other factors being equal (Investopedia, 2012). The firm may have a preference for one type of financing or
All theories of capital structure are considered supplementary. As Myers pointed out it is a 'kind of puzzle and every new theory fills a small gap'. (Does Capital Structure really matter?) Evaluating the tradeoff and pecking order theory Shyam-Sunder and Myers by analyzing the debt patterns through time they could find out that under the pecking order model, "a regression of debt financing on the firms deficit of funds should