From the course: Finance Foundations

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Does capital structure matter?

Does capital structure matter?

From the course: Finance Foundations

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Does capital structure matter?

- 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. Lily has a dream. She wants to start and operate her own ice cream business and she has figured out that it'll cost 200 million dollars to make that happen. Where will Lily get this 200 million dollars? 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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