Hi, I need some assistance understanding the following topic.
Topic: What are the most critical concepts involved with successful capital structure patterns? Can certain steps be overlooked? Why or why not?© BrainMass Inc. brainmass.com August 14, 2018, 11:41 pm ad1c9bdddf
I hope this is what you meant by "critical concepts." Of course, these remain very controversial, and the literature is all over the place. Much of this has to do with the nature of the firm rather than there being any single ratio between equity and capital that is optimal.
There is the customary mix of debt and equity which is always the first question. The latter refers to all stock and any retained earnings (especially if they are reinvested). Debt can be of both long and short term notes. Investors like the long variety because it shows a bank's confidence in the strength of a firm's earning potential for the long haul.
Debt cannot become too much in relation to equity. There is no clear formula here, but the basic rule is that too much debt, especially short term debt, can harm a firm's freedom of action and suggests that investors are shying away from the company. In the most general terms, the higher the equity proportion of the firm, the better off it seems to be. Equity means earnings - debt can mean confidence, but it can also mean that a company is struggling. Debt can be of two types - money market funds ...
The thoughts regarding corporate finance are examined.