Question

please discuss (with support) how you would set up the equity mix of a business organization using: common stock, preferred stock, loans, and/or bonds

Answer 1

The capital structure of a business will be made up of debt and equity. Debt consists of loans and bonds. Equity is made up of common stock and preferred stock. The equity mix will be made up of the common and preferred stock. The common stockholders will be considered as shareholders of the company. Preferred stock holders are considered as the preferred shareholders. The common stockholders will be paid dividends whenever the company earns profits while the preference shareholders will be given first preference when the company winds up. So, a balance of common stock and preferred stock should be maintained. Similarly, the capital structure of the company should also include a balance between debt and equity. If the debt component is high then the company is said to have an aggressive capital structure. But having debt in the capital structure will give tax benefits to the company. Thus, the balance is essential.