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Financial Planning, Capital Structure, and Risk

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An analysis of the effect of a company's capital structure on strategic financial planning and how it affects risk

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Let's begin by taking the question apart and considering each of the components separately. Then, we once we know what each component means separately, we can consider the components in relationship to each other. There are three major components involved: 1) a company's capital structure, 2) strategic financial planning, and finally 3) risk.

Let's now look briefly at each of these.

1. CAPITAL STRUCTURE describes the composition of a company's permanent or long-term capital, which consists of a combination of debt and equity. A healthy proportion of equity capital, as opposed to debt capital, in a company's capital structure is an indication of financial fitness. Equity consists of common and preferred stock plus retained earnings, which comprise the shareholders' equity account on the balance sheet. In summary, a company's capital structure is a combination of capital and debt, generally of the long-term variety, providing the company with the funding required to support growth, or 'money in hand to do stuff with' (except that in some cases, 'money in hand' may be derived from long term borrowing).

2. STRATEGIC FINANCIAL PLANNING describes the financial planning activities related to pursuing a chosen strategy. Strategy ...

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