Finance

Our firm needs to find out what levels of equity and debt will be optimum for us to finance our assets and operations

We have to look four factors that influence target capital structure Business Risk , Tax Position , Financial Flexibility and Managerial Attitude

Business Risk . Investopedia .Com defines business risk as the risk that a company will not have adequate cash flow to meet its operating expenses (undated . Analia Jones says that greater business risk , or more earnings volatility , would not lend itself well to a high level of debt financing

. This means that if our business risk is high , we will be better off selling stocks rather than issuing bonds . Investopedia adds that if a company would pose no financial risk relies entirely on equity financing

Tax Position . Using debt to finance our business is sound because of the tax deductibility of interest , thereby lowering the effective cost of debt (Jones , undated . A firm with a higher effective tax rate should consider using more bonds

Financial Flexibility . In general , companies with stable sales , good assets and high growth rates could obtain and use debt more heavily while companies with high profitability , poor credit ratings or a conservative management can use equity (Encyclopedia of Small Business undated

Managerial Attitude . A manager 's level of aggressiveness or conservatism will influence decisions regarding capital structures Jones explains that some managers are more inclined to use debt , even with its attendant risks , to boost profits--since debt maximizes the earnings per share . Another issue in managerial attitude is control Relying heavily on equity means management is shared by a lot of shareholders , which would dilute control (Encyclopedia of Small Business , undated ) This would help determine if we should sell common stocks (with attendant voting rights ) or stocks (typically without voting rights . If our managers have no problems with diluting control over the company (plus lower dividends , then let 's go with the common stock

AllBusiness .Com , however , has a different guideline : they suggest issuing common stock to founders and employees , while stocks should be issued to investors , since it gives more protection that stocks

Lastly , we focus on whether to lease or buy an equipment . As with everything else in this discussion , a lease vs . buy decision would rely on the company 's need for a particular equipment . LeaseGuide .Com offers an analogy to cars , which basically boils down to long-term cost savings or lower monthly payments . When you buy an equipment , you 'd have higher upfront costs , but will have lower costs in the long-term . You also avoid incurring debt . Leasing an equipment would save you from major repair and other risks , since the equipment is not yours in the first place . It also gives you lower monthly payments References "Business Risk " Investopedia . 28 March 2008 "Capital Structure " Encycloperdia of Small Business . Advameg Inc Retrieved on 28 March

2008 "Differences Between Common and Stock " AllBusiness .Com Retrieved on 28 March 2008 .Jones , Analia "The Target Capital Structure " Zero Million...