Question

How does the status of a company (privately held versus publicly traded) affect the relevancy of capital structure? Explain why and use either a hypothetical or real world example to support your answer.

Answer 1

Answer :-

The status of a company (privately held versus publicly traded) affect the relevancy of capital structure as:-

Market Liquidity :- A market Liquidity is a great problem in the large companies if they make their investment more and more through equity while in case of private companies a company can manage accordingle to the value or condition of the company by reducing investment or payment to outsiders.

Profit Management :- In case of public companies generally we see that they are always try to maximise thier revenue , Profit or we say sales while in case of private companies they mostly focus to reduce the taxes.

Capitalisation :- In case of public companies we see that they generally have a mix of debt and equity ratio while we see in the private companies they have their own capital mostly that is the reason we can do the valuation of private companies through enterprise value.

Risk Profile :- we see that a public companies are generally have a assurance of stability of working as compared to the private companies as public companies have a high capital . So when their is a downward change in economy then the private companies are very easily gets destroyed or failed.

Diffrence in operations :- A public company have a large operations or large sacle of industries while a private company have a small scale businesses.

This difference is due to the scale of operations , government regulations, public money etc. As private companies have a full owner capital while the public companies runs on a public money.

Example :- Take two companies as one is Cream bell and other is Tata Motors . Both the companies have diffrent Capital Structure As In Cream bell all the risk and rewards is of the single owner while in the Tata Motors the risk and rewards are distributed to pubic owners also.