From the course: Corporate Finance Foundations

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Does capital structure matter?

Does capital structure matter?

From the course: Corporate Finance Foundations

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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 a key finance question. Does it make any difference 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's figured out that it will cost $200 million to make that happen. In other words, it will take $200 million to turn Lily's dreams into reality. She needs to buy land and buildings and lots of ice cream machines. Well, where will Lily get this $200 million? Let's make some simplifying assumptions here in this example, just to keep it tractable. First, consider the short term financing issues such as where Lilly will…

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