The Importance of Capital Structure: A Finance Assignment

This assignment delves into the concept of capital structure, examining the student's expectations before and after watching a video on the subject. The student initially anticipated a potentially uninteresting discussion but gained a deeper understanding of the minute aspects involved in formulating an efficient capital structure. The video clarified the roles of debt and equity financing, highlighting the importance of a balanced approach, especially for emerging businesses. The assignment also explores how the video relates to the module's learning objectives, including the advantages and disadvantages of different capital structures, and the practical implications of debt versus equity financing. The student emphasizes the need for active balance sheet management, governance over restrictive payments, and the importance of considering economic backdrops, market environments, and growth ambitions when designing a capital structure. The assignment concludes by summarizing the key takeaways, including the necessity of balancing debt and equity financing to optimize a company's financial health and attract potential investors. The student references the video and academic sources to support their analysis.

0
Running head: THE IMPORTANCE OF CAPITAL STRUCTURE
THE IMPORTANCE OF CAPITAL STRUCTURE
Name of the Student
Name of the University
Author’s Note

1THE IMPORTANCE OF CAPITAL STRUCTURE
Table of Contents
1. What was your expectation before watching the video?..........................................................2
2. How has this changed after watching it?..................................................................................2
3. Has the video helped change your perspective about the issues?............................................2
4. How do you relate videos to the learning on module?.............................................................3
5. What have you learned that you can pass on to others?...........................................................3
Bibliography....................................................................................................................................5

2THE IMPORTANCE OF CAPITAL STRUCTURE
1. What was your expectation before watching the video?
I think capital structures provides any company the flexibility to grow in a financially
feasible manner along with allowing it to leverage its key resources and ensure greater
returns. I initially thought that the video will have been boring by discussing the similar
aspects and will not focus more onto the issue of capital structure.
2. How has this changed after watching it?
After watching the video I realized that there is lot more minute issues to delve into the
aspects of capital structure and these created a better understanding within me regarding
reformulation of an efficient capital structure within any company.
3. Has the video helped change your perspective about the issues?
The video helped me to understand that capital structure is the amount of operating money
that is acquired through the debt and equity. I learned that debt includes the loans and other form
of credit repayments like interest while equity involves selling of any company’s partial interest
to the investors as stocks. However, like debt financing, equity is not inclusive of any sort of
direct obligations as repaying funds in the future whereas equity investors becomes partial
owners of the firm which provides their a degree of control over the firm. Optionality in the debt
or equity is an example of capital structure. From a trading perspective when the market is open
taking enough liquidity from the market to maintain optionality is not great to ensure short
funding. Historical evidence of the 1980’s 90’s reveals that junk bonds were bad. Since, 2009,
after a surge in corporate borrowing it is need of the hour to rebuild liquidity and mitigate the
risk involved in shareholder’s backlash by obstructing the practice of using debts as a prudent
option to buy back stocks ("The Alchemy of Capital Structure", 2018). Thus after watching, the

3THE IMPORTANCE OF CAPITAL STRUCTURE
video changed my perspective about creating capital structure specifically for emerging
businesses as they possess limited funds. Cautious investors will not invest if they finds that a
company’s capital is more from debt financing as less from equity and hence this will not help
the company in the long run to raise its value. So initially more debt financing is may be allowed
but the rapid endeavor of the smartest managers should be shift the long term capitals from debt
financing to equity financing since this will simultaneously also attract a lot of potential
investors. It involves consideration of a number of parametric factors that determines the
efficient capital structures of various companies.
4. How do you relate videos to the learning on module?
The video related by understanding with my learning on the module through incorporating
the importance of capital structure, bad capital structure, the advantages and disadvantages of
capital structure as well as how it should be planned and implemented.
5. What have you learned that you can pass on to others?
I have learned from the videos that debt security is more often a negative optionality.
Active management of balance sheet is necessary and more focus on the asset side of the balance
sheet is given which is good but it is necessary that more keen focus should be given upon the
liability and shareholder’s equity side of the balance sheet. Moreover, debt financing involves
high risk due to the repayment option though it is cheaper ("The Alchemy of Capital Structure",
2018). On the other hand equity financing is not cheaper as debt financing but is less risky as it
does not involve repayments. There is necessity of governance over restrictive payments. It’s
hard to generalize about the best form of capital structure as it is creditor’s situation specific and
involves buyable and sellable factors. Hence, I can pass onto others my learning according to
which to design the best capital structure it is required to take decisions based on probable

4THE IMPORTANCE OF CAPITAL STRUCTURE
economic backdrops, market environment, growth ambitions of the companies, financial
regulatory rules along with anticipating currency, interest rates as well as equity cycles. Notably,
proportion of debt relative to equity should be reduced though avoiding debt in favorable
situations may render loss of opportunities for growth of the company. I learned that an efficient
capital structure should maintain a balance between the debt and equity financing in its capital
structure and a capital structure should be optimized until bettering off equity doesn’t lead to
worsening off debt and vice-versa.

5THE IMPORTANCE OF CAPITAL STRUCTURE
Bibliography
Allen, F., Carletti, E., & Marquez, R. (2015). Deposits and bank capital structure. Journal of
Financial Economics, 118(3), 601-619.
https://www.sciencedirect.com/science/article/pii/S0304405X14002499
Graham, J. R., Leary, M. T., & Roberts, M. R. (2015). A century of capital structure: The
leveraging of corporate America. Journal of Financial Economics, 118(3), 658-683.
https://www.sciencedirect.com/science/article/pii/S0304405X14001809
Robb, A. M., & Robinson, D. T. (2014). The capital structure decisions of new firms. The
Review of Financial Studies, 27(1), 153-179. https://academic.oup.com/rfs/article-
abstract/27/1/153/1572752
Serfling, M. (2016). Firing costs and capital structure decisions. The Journal of Finance, 71(5),
2239-2286. https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12403
The Alchemy of Capital Structure. (2018). Retrieved from https://www.youtube.com/watch?
v=7HTkZb7vDQY&feature=youtu.be