Respond To Discussion Posts 1

Each response has to be between 200 to 400 words. It has to be well written with your proper words most of the time. It has to be like you are talking to someone, agree or disagree with him, and support your ideas with saying why you agree or disagree, and use citations and references.

First one:
Capital structure is a way in which to value a business. Capital structure is a blend of equity and debt financing, which affect risk and cash flow. Because capital structure involves risk and cash flow, it affects the amount an investor would be willing to pay for the company (How Capital Structure Affects Business Valuation, 2012). To explain in more detail, capital structures differ in the manner debt is handled. Debt is often cheaper than equity because interest payments are tax-deductible (How Capital Structure Affects Business Valuation, 2012). Therefore, as debt increases, the equity returns also increase, which conversely increases the business’s value. There is a caveat to debt; however, debt becomes risk at a certain level (How Capital Structure Affects Business Valuation, 2012). The investor usually determines this level so, it may vary. Nonetheless, when investors view a certain amount of debt as risk, they will not be willing to pay or invest as high of a price. When companies reach a certain level of debt, the risks outweigh the rewards. “So, the optimal capital structure comprises a sufficient level of debt to maximize investor returns without incurring excessive risk” (How Capital Structure Affects Business Valuation, 2012).

According to How Capital Structure Affects Business Valuation, identifying the optimal structure includes using industry averages, examining similar companies’ capital structures, referring to bank’s debt-to-equity lending criteria and using financial models to determine an optimal capital structure (How Capital Structure Affects Business Valuation, 2012). It is essential to be aware of different capital structures to understand how companies are valued so investors can make an educated decision when buying or investing in a business. Shark Tank is a perfect example of this. On the show, entrepreneurs ask for investments for companies that are self-valued. The sharks, or investors, always ask in-depth questions to understand how the entrepreneurs valued the company. The sharks use their expertise to make their valuations and base their investment to an amount they see fit- based on the information they received from the company and their personal experience.

Second one:
A company’s capital structure consists of debt and equity to finance its operations and long-term growth. Debt usually consists of bonds and loans, while equity is generally made up of shares and preferred shares (Kebewar, 2012). Companies balance the two, making trade-offs between increasing debt or issuing equity to finance their operations. The amount of debt that a company assumes relative to its equity (known as the debt-to-equity ratio or leverage) can indicate its risk level. Typically, a company that relies heavily on debt to finance its operations is considered to have a bolder capital structure (or high leverage), which translates into higher risk for investors (Fidelity, 2020). The role of capital structure in explaining corporate performance has been the subject of much research for almost half a century (Kebewar, 2012). Indeed, researchers have analyzed the capital structure and tried to determine whether an optimal capital structure exists.

The optimal capital structure is generally defined as one that minimizes the cost of business capital while maximizing the firm’s value. In other words, the optimal capital structure is one that maximizes corporate profitability (Kebewar, 2012). Relative levels of equity and debt affect risk and cash flow and, consequently, the amount an investor is likely to pay for the business or an interest in it (Stelzman, 2012). When a company incurs a debt, it can bring significant financial benefits. Debt is almost always less expensive than equity, and interest is tax-deductible. Thus, when debt increases, the return on equity also increases, which increases the company (Stelzman, 2012). Above a certain level of indebtedness, higher indebtedness corresponds to higher risk and, therefore, negatively impacts. When debt reaches this stage, investors may demand compensation for taking more significant risks, which lowers the company’s value. Therefore, the optimal capital structure includes a sufficient level of debt to maximize investor returns without incurring excessive risk (Stelzman, 2012).

Third one:

The Capital Structure within an organization is the particular combination of debt and equity used by a company to finance its overall operations and growth. Within Capital Structure long-term debt, short-term debt, common stock, and preferred stock are considered (Tuovila, 2020).

The impact Capital Structure has on an organization can come from multiple directions. First, analyses of the Capital Structure of a company can indicate the equity and overall performance of an organization. For example, the Debt-to-Equity ratio provides an insight into the risk of a company’s borrowing practices. This is of importance, because an organization that has a negative situation concerning the capital structure, is mostly more financed by debt, and therefore a greater risk to investors (Tuovila, 2020). Therefore, the Capital Structure of an organization is of importance to the organization and the (possible) investors for the company. To “fight back” against these analyses, organizations incorporate debt and equity into their corporate strategies. Also, research has been done after factors that influence financing decisions within an organization. In this research, there has been found that business planning, firm size, and business objectives are significantly associated with debt (Romano, 2001). Organizations tend to use capital and retained profit because of the desire to achieve growth through new products or process development. Also, equity is a consideration for owners of larger organizations because of the desire to achieve growth. Therefore, Capital Structure has an impact on the overall organization, but also on a firm’s overall value (Romano, 2001)

Also, Debt can be of significance in positive way for an organization, as debt is a way for an organization to raise money in the capital market (Tuovila, 2020). By raising this money for the organization, Capital Structure can have a positive significance to the organization. The benefit is mainly that by raising money from debt, the organization benefit from tax advantages, as interest payments as in borrowing funds may be tax-deductible. Also, Debt gives organizations the privilege to retain ownership instead of giving it to the equity holders (Tuovila, 2020). Next to that, it is believed that the capital structure of an organization can increase the organization its overall value when minimizing its cost of capital. This is important because the role of capital structure is the reason for discussion when considering its impact on a firm’s overall market value. Analysts of corporate finance, also indicate that it is wise to minimize the cost of capital and giving fewer returns to borrowers from which they finance their debt to increase an organization’s value (Saeed, 2014).

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