Explore BrainMass

Explore BrainMass

    Capital Structure of a Firm

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    How does the capital structure of a firm compare to the capital structure of an individual? In what ways are they similar? Can you provide an example of how individuals use debt and equity in their personal financial lives that parallels the basic capital structure decisions made by a firm?

    © BrainMass Inc. brainmass.com June 4, 2020, 1:06 am ad1c9bdddf
    https://brainmass.com/business/capital-structure-and-firm-value/capital-structure-firm-379224

    Solution Preview

    CAPITAL STRUCTURE

    How does the capital structure of a firm compare to the capital structure of an individual? In what ways are they similar? Can you provide an example of how individuals use debt and equity in their personal financial lives that parallels the basic capital structure decisions made by a firm?

    Answer:

    The capital structure of a firm is composed of debt and equity. Debt is composed of loans from banks and from other forms of securities such bonds. On the other hand, the equity portion of the capital structure comes from owners of business who may be the stockholders. The debt- equity ratio tells how a firm is dependent on either internal or external sources of finance. Hence, a low debt- equity ratio manifests that a firm has low debts and high levels of equity, indicative of high dependence on owners or internal ...

    Solution Summary

    The solution discusses how does the capital structure of a firm compare to the capital structure of an individual.

    $2.19

    ADVERTISEMENT