Does the stage of a company’s cycle (start-up to well established to bankruptcy) determine financing structure?

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Expert Solution

Financial structure- It is a mix of equity and debt in the company. Company uses majorly equity and debt for financing its Capital expenditures and business operations. Ratio of debt and equity in a company's financing option is called financial or capital structure.

Company's cycle- Company has different phase in its life, it has start up, growth, maturity and bankruptcy.

Capital structure decision is affected by different phases of life of the company.

Start up phase- In this phase, company start ups its operations, company is new in the industry, it needs funds that it takes mainly from banks, friends, relatives etc. A new company does not go public very soon because people do not easily rely upon its financial stability and fundamentals.

Well established- A well established private company can go public by coming up with Initial public offering (IPO), it raises funds from market, people rely upon its fundamentals and financials hence buy shares through IPO and in this way, companies in this stage get funds, a public company can come up with Further public offer (FPO). Companies also raises funds by issuing bonds.

Bankruptcy- Company in this stage, collects funds by selling its assets and business.. A trustee is appointed who take sells company's assets and uses the proceeds to pay to creditors of the company.

jeff jeffy answered 8 months ago

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