Capital Structure and Financing Strategy
Development of the capital structure is part of the financing process illustrated in Figure 1.1
. Establishing a financing plan and addressing the capital structure is done after management has clearly articulated the company’s business plan and can articulate how much funding is required, how it will be deployed, and when it is needed. The overall financing strategy will result in a target capital structure and plan to obtain financing from various sources. We address the details of financing sources in Chapter 5, but consider that in broad terms there are internal sources of financing (i.e., better asset utilization and profits), related party financing (i.e., customers, suppliers, and industry players), and external sources (i.e., commercial banks, private equity investors, etc.).
Defining the capital structure is a critical decision for any business organization to make. The capital structure of a company refers to the amount of its debt and equity, and the types of debt and equity used to fund the operations of the company. The selection of capitalization alternatives is important not only because of the drive to maximize returns to various organizational constituencies, but also because of the impact such a decision has on an organization’s ability to deal with its competitive environment. The prevailing argument, originally developed by Franco Modigliani and Merton Miller (“The Cost of Capital, Corporate Finance, and the ...