Capital Structure
Capital structure is the particular combination of debt and equity used by a company to finance its overall operations and growth.Equity capital arises from ownership shares in a company and claims to its future cash flows and profits.
Definition: Capital structure is the specific combination of debt and equity that a company uses to finance its overall operations and growth. Equity comes from ownership shares in the company and claims on its future cash flows and profits.
Origin: The concept of capital structure dates back to the early 20th century, particularly in 1938 when economists Modigliani and Miller proposed the famous MM theory, which states that in a perfect market, capital structure does not affect a company's value. This theory laid the foundation for subsequent research on capital structure.
Categories and Characteristics: Capital structure is mainly divided into two categories: debt financing and equity financing.
- Debt Financing: Obtaining funds through loans or issuing bonds. It requires regular interest payments and repayment of the principal upon maturity. The advantage is that interest payments are tax-deductible, but it increases the company's financial risk.
- Equity Financing: Obtaining funds by issuing shares. Shareholders share in the company's profits and losses without the need for regular interest payments. The advantage is reduced financial risk, but it dilutes the ownership of existing shareholders.
Specific Cases:
- Case 1: A tech company raises 100 million yuan through bond issuance to fund new product development. Although the company needs to pay interest, the success of the new product significantly increases profits, effectively managing the cost of debt financing.
- Case 2: A startup raises 50 million yuan through equity financing for market expansion. Although existing shareholders' stakes are diluted, the company successfully enters a new market, and the stock price rises significantly, benefiting all shareholders.
Common Questions:
- Question 1: Should a company choose debt financing or equity financing?
Answer: It depends on the company's specific situation. If the company has stable cash flows, debt financing can be chosen to enjoy tax benefits; if the company is in a high-growth phase, equity financing may be more appropriate. - Question 2: How does capital structure affect a company's financial health?
Answer: Capital structure directly impacts a company's financial risk and financing costs. A reasonable capital structure can reduce financing costs and increase company value; an unreasonable capital structure may lead to financial distress.
