A Preview of Capital Structure Issues

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A preview of capital structure issues In regards to the overall business environment, capital structure has profound implications of the business, irrespective of its industry. For one, a firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $40 billion in equity and $160 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example is referred to as the firm's leverage. This leverage has implications on the entire firm. For example, leverage in many respects is a double edges sword. On one hand, leverage can amplify gains for firms. However, if used incorrectly, leverage can also amplify loses. As such, firms must be cognizant of its capital structure as complacency can hinder overall business performance. Debt and equity financing, can have a profound implications on the business overall. In particular, prevailing interest rates can better determine adequate means of debt or equity financing. Taking the prevailing interest rates today would suggest that debt financing may be ideal for more capital intensive businesses. For one, many companies can lock in fixed terms at todays very low rates. These rates are often outpaced by inflation. As such, companies may find a capital structure skewed heavily towards debt financing to be very advantageous. For one, the low interest rate environment makes debt financing very attractive relative to
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