In: Finance
In a perfect world, if the firm value is $76 under the debt-laden capital structure (say $70+$6), but the managers chose the $75 capital structure (say, all equity), what would you do?
Capital Structure is basically how a firm finances its overall operations and growth by using different source of funds. It is combination of both debt and equity in right balance, I say right balance not equally balance. It is the key of capital structure.
Debts can be comprised of:-
Equity can be comprised of:-
Benefits for Issuing debt by the company:-
Benefits for issuing equity by the company:-
For the above case, I would suggest the firm to find a right balance of equity and debt for the capital structure. To be precise, I wold suggest 60% debt to reduce the tax burden of the company and to protect the ownership dilution. 40% equity for the capital structure is good enough.