Question

If a company is in the midst of hard times (e.g., losing money, cash shortfall) do you think it is easier to initiate restructuring with a capital structure weighted more toward equity, debt or a balance of both? Explain why or why not.

Answer 1

If the company is in the midst of hard times, then the company will be facing various kinds of cash shortfall and it will be losing money so if will not be easier to restructure towards taking more of debt capital because debt capital is only offered to those companies who are having a higher creditworthiness but this company is not having a higher creditworthiness and it is facing with solvency crisis, so this company should not be taking additional debt and the Lenders should also not be willing to issue it more that so this company should be trying to restructure its overall capital structure by issuance of more of the equity shares in the market and this company should try to sustain and survive through adverse scenario first rather than taking additional debt capital, because that will be putting on additional burden on the company and that will be putting additional risk on the company for survival on the long run.

Hence, I would advocate that this company should be trying to focus upon taking higher amount of equity capital and its should try to restructure the capital structure by issuance of more equity capital and disposing off debt capital in order to stabilize and sustain and survive in long run