I’m studying and need help with a Business question to help me learn.
I need three responses of at least 200 words each for the below students discussions for this week. Also in the bold below are the questions the students at answering.
Consider the following statement: “The size of a company is not important. What does matter, whether it is a large corporation or a small business, is the capital structure – it always has and always will.”
Do you agree or disagree? In 300 words, support your position.
“The size of the company is not important. What does matter, whether it is a large corporation or a small business, is the capital structure – it always has and always will.” Interesting quote here that needs further research to determine its validity. In order to determine which side to lean toward, let’s start by identifying what Capital structure is and understanding how capital structure is used.
Capital structure is the combination of debt and equity used by a company to finance its overall operations and growth (Tuovila, 2019). Bonds and loans are examples of Debt, while common stock, preferred stock or retained earnings refer to equity. Additional debt such as working capital requirements is also part of the capital structure. Capital Structure is equity and debt used to buy assets for your company in order to make income. Debt consist of borrowed money that requires to be paid back to the lender, typically with interest. Equity consist of ownership rights in the company and the debt-to-equity ratio is useful in determining riskiness levels of the company’s borrowing practices.
Understanding the use of capital structure will help answer whether the size of the company matters. Debt is one of the two main ways a company can raise money in the capital markets. Companies benefit from debt because of its tax advantages; interest payments made as a result of borrowing funds may be tax deductible (Tuovila, 2019). Debt also allows a company or business to retain ownership, unlike equity. Interest rates determine just how much debt a company will get into. Equity does not need to be paid back and only returns dividends to their investors if the company makes profits.
After reviewing what capital structure is and understanding how it is used leads me to believe that the size of the company does not matter, and that equity capital and debt capital ratio will determine just how successful a company will be. Capital structure will make or break a company.
Tuovilo, A., (October, 2019). Captial Structure. Retrieved from https://www.investopedia.com/terms/c/capitalstructure.asp
Kennon, J., (June 2019). An Introduction to Capital Structure. Retrieved from https://www.thebalance.com/an-introduction-to-capital-structure-357496
The statement has some flaws but for the most part I think it is correct. Capital structure is defined as the debt and equity of a company that help the business operate. (Cornett, 2018) The size of a company does not matter when thinking of using this structure. The mere fact is a capital structure is the most important thing to have in business is accurate. In general, when operating a business it is very important to know the different areas of financial information is needed. Unlike financial structure, which includes short-term debt, long-term, and shareholders funds, the capital structure is made up of long-term debt and shareholder funds. (Peavler, 2018) Capital structure should also not be confused with Assets Structure. Assets Structure is the balance of total assets used in the company. (Peavler, 2018) While the three financial structures are important in there own way, knowing the different purposes for all of them is pertinent to its use.
When a company focuses on the capital structure they are investing in increasing the market price of shares and securities. The capital of a company contributes in its development to the companies ability to manufacture building, buy new equipment, and update their technology. (Peavler, 2018) Without determining the companies capital they and unable to determine if there is money to support new projects. If a project does not have the money required based on the capital structure analysis, the project would not proceed. As we mentioned last week, when a company does not focus on the in-flow and out-flow of cash, things can absolutely get messed up and lead to bankruptcy or corrupt decisions. The difference between a small business company and large business company can be anywhere from the supplier credit and supplier credit and firm liabilities respectively. (Peavler, 2018) For any type of business, it is important to manage the money in multiple ways to ensure its success.
Cornett, M. (2018). Finance: Applications and Theory (4th ed., p. 531). Retrieved from https://newconnect.mheducation.com/flow/connect.html
Pant, S. (n.d.). Capital Structure: Meaning, Concept, Importance and Factors | Accounting. In Your Article Library. Retrieved from http://www.yourarticlelibrary.com/financial-management/capital-structure/capital-structure-meaning-concept-importance-and-factors-accounting/65150
Peavler, R. (2018, November 12). The Balance Small Business. In What Is Capital Structure for Small Business?. Retrieved from https://www.thebalancesmb.com/capital-structure-definition-393275
The size of a company and the capital structure it operates under are both things that are likely to evolve over time. While they are both important to the shareholders and stakeholders of the company, the capital structure is more important. The capital structure of the company provides security or risk. It also provides for opportunity, growth and stability. A company must have capital to fund their operations and growth. A proper capital structure should provide stability to the company’s operations and the opportunity to grow. This capital is often a combination of equity and debt and the ratio will change based on the availability and needs of the company (Cornett, Adair & Nofsinger, 2015). As companies grow, they are subject to both a change in ownership structure and capital structure. The combination of a company’s size, ownership structure and capital structure position the company for future growth as well as establishes their exposure for risk and bankruptcy (Chen, 2002).
A company must decide on a capital structure that fits their current and future requirements. The current size of the company and the capital needs will create opportunities and challenges to sourcing the required capital. New companies are often required to rely on equity and personal assets to provide capital as they do not have the credit or assets to borrow against. Once a company is established and is in the process of growing, the capital needed to support that growth will often outpace the available equity. This requires additional debt in the capital structure and the opportunity to get it. The interest paid on this debt provides tax advantages for the company. In cases that involve ownership by private equity or venture capital of mid-sized companies, the debt is often offered by the holding company. This offers shareholders the advantage of earning both interest and tax benefits (Lindsay & Craig, 2002). A company’s capital structure becomes more complex once it grows to a large or multi-national company. This creates an opportunity for a company to use a lot of different methods to raise capital. There is also many opportunities for the company’s ownership structure to shift.
Chen, K. (2002). The influence of capital structure on company value with different growth opportunities.
Cornett, Adair, & Nofsinger (2015). Finance Applications & Theory 3rd ed. New York, NY: McGraw-Hill Irwin Melicher, R. W. & Norton, E. A. (2013). Introduction to Finance: Markets, Investments, and Financial Management, 15th edition.
Lindsay, N. J., & Craig, J. B. (2002). A framework for understanding opportunity recognition: Entrepreneurs versus private equity financiers. The journal of private equity, 6(1), 13-24.