© 2000 John Petroff
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© 2000 John Petroff |
So far we have identified the reasoning
that justifies a capital structure was described in the following
sequence:
1- company's composition of resources of working capital and fixed
assets, which, in turn, are required by
2- sales growth, which is mitigated by
3- variability of earnings, and
4- a proper recognition for potential default.
We have also empahized a dicotomy between the choice of debt financing versus equity. Naturally, within each alternative a large assortment of instruments are available, each suited for a specific purpose and conditions. Moreover, changes in capital markets give rise to opportunities that can be exploited with judicious liability management strategies described in next chapter. The desirable proportion of debt is not constant. The corporate life cycle discussed above showed that borrowing is most desirable toward the latter phases of the corporate life cycle, but it is not appropriate in the early phases when the firm needs rapid growth. In other words, the efforts aimed at finding a general explanation of financial structure. In this section, we pay attention to explanations of differences. And we start with the differences causes by different reasons to use debt or not to use it.
See review question Q-11F.1.
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