Corporate structure and organization

Corporate

Capital structure decisions are difficult to make since they often imply large sums of money, but even more so because they would come to impact the future of the organizational agent. There is a wide array of quantitative factors to be assessed when making capital structuring decisions, such as the expected return of the investment, the number of years it would require for the venture to be profitable, the taxes involved and so on.

But aside from these forces, there are also some qualitative aspects to be assessed when making capital structure decisions. One example in this sense would be represented by the investment in a fast food store, which is unhealthy and further damages the health of the population. In other words, in making such a decision, emphasis should be placed on the social impact of the investment. Also, other elements to be taken into consideration include the preparedness of the firm to engage in the processes implied by the new capital decisions, the management of employee reticence to change or the social and economic need of the respective venture.

A final element to be assessed, one that has gained more and more importance in today's setting, is represented by the recession proof feature of the business, understood as the ability of the firm to survive in tough economic conditions. A relevant example in this sense is represented by investments in businesses such as healthcare or nutrition, as these generate demand regardless of economic state.

Statement 1

An important aspect to be addressed by the economic agent, as well as by the individual, is represented by the amount of debt contracted. In most cases, debt is necessary in order to make investments and generate profits. At a basic level, it is prudential to contract as little debt as possible. Such an approach reveals a high threshold for risk, including also low levels of expected profitability.

In other words, the higher the levels of debt, the higher will also be the risks and the volumes of registered profits. In such a context then, the overall level of debt contracted by each economic agent is a direct function of their aversion to risk, as well as the nature of the business, the financial strengths of the company or the business and managerial model implemented.

In terms of the individual, the level of debt contracted should be balanced at a ratio lower than the debt contracted by an economic agent. And this is explained by the fact that individuals are not generally profitable entities, and they as such do not use debt to create additional resources, but more so use it to stimulate consumption.

Statement 2

Another issue which is being raised in terms of debt is represented by the relationship between the amount of debt contracted and the very business which contracted it. This relationship is highly complex and reveals a multitude of issues worthwhile mentioning.

On a first note, it should be argued that whatever debt a company contracts, it should be able to repay it. In other words, economic agents should contract debt in direct relationship with their reimbursement capabilities. Then, the level of debt would be pegged to the nature of the investment. If, for instance, an investment is characterized by low risk and a steady income, more debt could be contracted to fund it. If, on the other hand, the investment is risky, less debt should be contracted to fund it.

Overall, in the debt decisions of the firm, emphasis should be placed on financial sustainability and the stability of the firm should not be threatened by the debt contracted.

Statement 3

Another important issue to consider in the contraction of debt is represented by the impact of this debt on the company stakeholders -- employees, business partners, the public, and most importantly, the share holders. The primary scope of the economic agent is that of creating value for its stakeholders, but excessive debt could jeopardize this desire, especially since debt is money that has to be repaid and it as such reduces the future levels of profitability.

At the level of value creation, a crucial aspect to be analyzed is represented by the source of the debt to be contracted. On the one hand, there is the contraction of debt through loans, which are characterized by the fact that control and ownership of the company remains intact, but payments have to be regularly made; the payments are nevertheless tax deductible.

On the other hand, there is the contraction of debt through equity, which means that control and ownership are adjusted to integrate the new shareholders, that payments in dividends are legally accounted as profits, but that payments are only made when profits are generated and when the board decides to offer dividends. In essence, when contracting debt, economic agents must also consider the impact of the debt on the shareholders.

Statement 4

The decision between debt through loans and debt through equity is more complex than meets the eye. Various economists across the years have assessed the situation and have yet to come to a universally accepted conclusion. Each of debt through equity and debt through loans is characterized by its own specific features, such as legislative framework, repayment, impacts on organizational control and so on.

And each economic agent is characterized by its own features, such as size, administrative construction, industry in which it operates, previous means used in the accessing of funds and so on. The balanced decision is one in which the company maximizes its chances of profitability at the intersection of the company features and the debt method features.

Statement 5