Share
Explore BrainMass

Bank's Influence on Capital Structure

How does a bank influence a firm's capital structure decisions in the area of leverage, debt maturity and source of debt?

Solution Preview

Bank's Influence on Capital Structure

How does a bank influence a firm's capital structure decisions in the area of leverage, debt maturity and source of debt?

LEVERAGE:
A bank can influence a firm's capital structure in the area of leverage through the instruments of interest rate and security required for granting loans. Leverage refers to the amount of dent a firm uses to finance its assets. A firm with significantly more debt than equity is highly leveraged. If the bank changes its interest rate or changes the requirements for security required for credit, the extent to which the company can borrow changes. For instance, if a bank or the banking system reduces the interest rate the firm can borrow more money for the same interest payment. If the firm increases its borrowing it becomes more leveraged than it was before. Let us take another example, if the bank changes the requirement securities this can also influence the leverage of ...

Solution Summary

This answer provides you an excellent discussion on Bank's Influence on Capital Structure

$2.19