The specific mixture of non-current debt and equity that a firm chooses to use is commonly known as the firm’s capital structure. Capital structure is how a company finances its operations and growth through a combination of debt, equity, and other financial instruments.
There are various reasons why a firm may choose a particular capital structure. first, a company may need to raise funds to finance its operations and growth. Debt is a cheaper source of finance than equity because interest payments on debt are tax-deductible, while dividends paid on equity are not. Thus, companies often use debt to finance their operations, particularly when interest rates are low. However, too much debt can increase the financial risk of a company.
If the company is unable to make its interest payments, it may default on its debt, which can result in bankruptcy. Hence, companies need to balance the benefits of debt financing with the risks involved. Equity, on the other hand, represents ownership in the company. Shareholders invest in the company by purchasing shares, which entitles them to a portion of the company’s profits. While equity is more expensive than debt because it represents a share in the company’s ownership, it does not have the same risks as debt. Shareholders do not have the right to force the company into bankruptcy if it cannot pay dividends.
The capital structure a company chooses can have a significant impact on its financial performance. For example, a company with a high debt-to-equity ratio may experience higher interest payments and therefore have lower profits, while a company with a high equity-to-debt ratio may have higher dividend payments but may have limited access to funds for growth.
In short, the specific mixture of non-current debt and equity that a firm chooses to use is known as its capital structure. Companies need to balance the benefits of debt financing with the risks involved and choose a capital structure that maximizes their financial performance while minimizing financial risk.
What do you call the specific mixture of non-current debt and equity that a firm chooses to use?
Ross, Stephen, et al. Fundamentals of Corporate Finance, McGraw-Hill Education (Australia) Pty Limited, 2021. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/deakin/detail.action?docID=6629434.
Created from deakin on 2022-02-02 05:17:49.