From the course: Finance Foundations (2019)

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Does capital structure matter?

Does capital structure matter?

From the course: Finance Foundations (2019)

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Does capital structure matter?

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Let's talk about obtaining long-term financing, owner investment, and long-term loans, the permanent financing that's the backbone of any company's financing. And here is the key finance question, does it matter how I structure my long-term financing? Does it matter how much owner investment I have and how many loans I have? Does this financing mix impact the value of my company? Let's illustrate this with an example of Lily's ice cream company, a hypothetical example. Now Lily has a dream. She wants to start and operate her own ice cream business, and she has figured out that it will cost $200 million to make that happen. Well, where will Lily get this $200 million? Let's make some simplifying assumptions here, in this example, just to keep it tractable. We will focus on the long-term financing to buy the big stuff; the land, the buildings, and the equipment. Lily's capital structure is defined as the mix between owner investment and long-term borrowing. Where will she get this $200…

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