A Rose by Any Other Name Essay
Capital Structure: The Choices and the Trade off
Neither a borrower nor a lender be
Someone who obviously hated this part of corporate ﬁnance
The Choices in Financing
There are only two ways in which a business can make money.
• The ﬁrst is debt. The essence of debt is that you promise to make ﬁxed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business.
• The other is equity. …show more content…
The transitions that we see at ﬁrms – from fully owned private businesses to venture capital, from private to public and subsequent seasoned offerings are all motivated primarily by the need for capital.
In each transition, though, there are costs incurred by the existing owners:
• When venture capitalists enter the ﬁrm, they will demand their fair share and more of the ownership of the ﬁrm to provide equity.
• When a ﬁrm decides to go public, it has to trade off the greater access to capital markets against the increased disclosure requirements (that emanate from being publicly lists), loss of control and the transactions costs of going public.
• When making seasoned offerings, ﬁrms have to consider issuance costs while managing their relations with equity research analysts and rat
Measuring a ﬁrm s ﬁnancing mix …
The simplest measure of how much debt and equity a ﬁrm is using currently is to look at the proportion of debt in the total ﬁnancing. This ratio is called the debt to capital ratio:
Debt to Capital Ratio = Debt / (Debt + Equity)
Debt includes all interest bearing liabilities, short term as well as long term.
Equity can be deﬁned either in accounting terms (as book value of equity) or in market value terms (based upon the current price). The resulting debt ratios can be very different.