Capital Structure Dynamics and FIRM SCALE

thumbs up

Ease your homework burden with top-notch homework help service. Say goodbye to deadlines stress and let our expert tutors handle your assignments effortlessly.

Focus on what truly matters while we handle your homework and grades.

trustpilot ratings


trustpilot ratings


trustpilot ratings


In real case scenarios, you scarcely enjoy the luxuries of optimal capital structures and of the perfect size of a firm from the beginning. But, you are used to handling the situations which are caused in the company’s history or past. You obviously have a well-maintained set of instruments which you often put to use. Along with the tools, you also have some goals you wish to accomplish.

But, you should know the ways to decide your ambitions, and the way to achieve them. This chapter teaches you these facts. Here we connect all the dots starting from theoretical concepts of capital structures, to any changes in the very structure and also the firm size.

We well learn both on the conceptual stages and also grasp practical views on them.

This chapter is ample and equivalent to two chapters. Those are:  management of working capital and public offerings.

21.1 Capital Structure and Firm Scale

Suppose you are a CFO of a big-scale company. And you want to maximize the wealth of shareholders. But, the current structure of capital was already determined through the past records of your firm—you do not have to start from the scratch.

But, also a fraction of these future changes can be controlled by you, while for some you cannot. Considering your present situation in this case, what are the questions or issues you have to stress upon?

Important points:

What are the special tools you have for applying? What can give you away?

21.1 A the Key Decision Questions

But, there happen to be a set of actions which you are able to take. These are:

  • Paying out of cash
  • And raising much more money
  • Expand your activities
  • And much more

Hence, there rise two fundamental questions:

What are you able to offer to your investors for the project opportunities they have?

How much do the investors understand?

But, what if you, you are the manager you want to act upon;for the company’s owner, then you have always to keep two elemental questions prepared:

  • Is the only option available to the investor for better investments of money or the investor can find other effective ways of investment on their own?

And if you have doubt, you should indeed return the money of the investees back to them.But in the case of your firm’s ‘investors’ money, on which you can work. They must have ownership for the earnings that companies generate.

  • Does your investor have faith in your methods; that there will be an increase in the value—and their money is spent well?

But, your investors have to agree with the judgments you provide, as is the case for a perfect environments for a market, then you will face no problems with them.But what if, there is disagreement among you and your investors?—as this is the usual case for imperfect markets.

For instance, investing is a newly introduced technology and proves itself worth; which is only known to you. But despite its worthiness;   it demands to cut the dividends. Your investors may interpret these clauses negatively. So, your investors think that they have to hit on the right market value, which feels to them like throwing away the money.

But, if you can prove yourself correct, eventually they will realize the gain in values, and finally, investors will appreciate the share price.

But for this year, no consolation can work for the investors who were bound to sell the shares this year. So, will you keep on representing your current investor? Or will you switch for a future investor?

Practically, this is not an easy question, and hence there is no predicted answer.

Among the two dilemmas, the later shows that one may worry about the structure of the capital having intricate connections to the operations of your firm. Also, there may be disclosures for every project opportunity, corporate governances, and disclosure policies.

While, there are great opportunities to offer to the investors in your firm, all your managers will be motivated, and this can help you convince the investors to invest for these large scopes. In this case, the simple answer for both questions asked above is yes!

On the other hand, you can also create values by minimizing the dividends and repurchases of the shares and raising the equities.

But, consider that the answer to all the questions is a no, then your firm cannot issue for any equity and hence has to seek for chances to increase the dividends and vice versa.And if there is a dilemma in achieving an answer, you have to arrive at a judgment.

21.1 B Mechanisms Influencing Capital Structure and Firm Size

Let us assume; you have already found out the chief motives of the investors. You are aware of the financial structure and size of the firm. But, most tools you generally use for the capital structure are consequences for the scale of the enterprise.

So, if you are issuing any debt or equity, your organization becomes of larger size. Hence, if your organization faces dynamic growth in the right year, Along with The increase in investment of the company, the leverage falls.As CFO, one should use their tools cautiously and should be aware of both possible outcomes—the financial structure and the firm size.Let us see a more conceptual theory for the proper use of your tools. Checkout the image

Capital Structure and Firm Scale 1

Among them, it is possible that you will suspect most of the mechanisms.

For instance, when a company issues debt, not only the firm size increases the debt proportion also increases.

It is not easy to deduce the company which for today may have the higher leverage through just a quick look out at their past financial transactions of debts and equities.

Let us discuss some dwelling issues:

Non-financial claims: These claims are often of larger scales as financial liabilities of debts and assets. These operations of corporates can help in increasing both the assets and liabilities exactly like it happens for the financial claims.

Non-financial can be a result of your action. This may be intentional or unintentional.

Existing leverage: In this case, the former capital structure of the firm plays a significant role in issuing. Consider a $200 million worth company with cent percent Debt ratio. But these rates are non-linear in both debts and equities.

Hence, the ownership structures issue 100 million dollars in new shares of investments, and this does not transform the respective ratio of bonds. But on the other hand another, large scale firm with a worth of $180 to $200 having 90 percent debt ratio. It claims the same- 100 million dollars in the equity; this results in a drastic shrink in leverage approximately to $180 or $300 which stands up to 60% of debt ratio.

So, can a company which issues debt and equity of $400 million and $100 million respectively lower the leverage ratio?

If yes—then the firm has $900 million for debt and 100

Millions of dollars for equity. Thus the financial to debt ratio of the company will drop from 90 percent to 87.

Issues in issuing consecutive Debt and Equity: Equity issuing and debt issuing of these often occurs on a joint basis. And so most of these activities are synchronous and merger.

And it is seen that new equities or debts tend to increase in steeply when one firm is acquiring another company. Thus, the scenario often happens such that when a company issues an enormous amount of equity, the ratio of debt goes up. This is not because issuing equity, but because of other simultaneous activities.

Value changes: Various substantial benefits changes and also affects both scales of debt to equity ratio.

For instance, there is a firm that has financed $100 in a 50-50 risk-free situation of debt and equity. Now with doubles in the values of $200 we see that the debt to equity ratio change to 50-150. We are all aware of the aftershocks of return in stocks in the IBM scenario—when the share prices started tumbling from 121 dollars to 78 dollars for each share, the equity of the same is lost for one part of threes of the total value. Thus, the size of IBM reduces, and it increases IBM’s debt proportions.

What are the factors that may initiate the changes in firm value?

There are many factors, but some of them are beyond controls of the manager. For instance, the existing investors may suddenly start averting risks and hence may discontinue paying 121 dollars for per share for IBM anymore in a risky market.

While, there can be other factors which may also change the value of IBM. Such as; broad and diverse orders for video gaming machines, CPUs or a natural calamity can destroy all. So it can be both good and dreadful news.Indeed, a few fractions these changes in values are controlled by the manager. Either your firm is paying a huge amount for equity into dividends to the shareholders, or you are governing the company very poorly.

We usually ignore the effects due to changes in bond price. And when there is an increase in rates in economy-wide, or there is deterioration in the firm’s rating of credit, at those times the debt falls in value along with equity in numerous cases. Conversely, when there is drop in interest rates economy-wide, the credit ratings of the firm appreciate as there is an increase in debt and in equity as well.Thus, the results for changing the rates of interest on the debt to equity ratio are totally ambiguous.In sum, the prime point is simple: Do not ever make any common mistake in equating issuing of debt or equity causally.

The Multi-Consequence and Multi-Mechanism View

For every manager, they have distinct mechanisms which cannot be influenced by you and also you have some tools at your available range.  All you need is to point at both the ratio of capital structure to the size of a firm.

The scale indicates the payment of Dividend, bond coupons, debt, and also repurchasing of equities. Issuing any debt and equity is the method of transferring money from the inside of the organization to the owners outside or vice versa.

The ratio of Debt refers to issues about Equity, repurchases of debt, and payments of interest. These are the tactics for diminishing the debt to equity ratio of the firm.

But how do these mechanisms work simultaneously?

Let me illustrate. Suppose you are in that previous example where the firm is in a perfect market environment of Modigliani-Miller.

In this case financing it has no influence on the total value of the company. Now assume that the worth of your firm is 1 billion dollars,out of that 400 million dollars is the debt which also includes liabilities of a non-financial category.

Now let us presume you want to raise 100 million in any new equity and also raise 200 million in any new debt. So, you pay 30 million to complete the old debts both along with principal and interests, and also you pay $20 million for dividends. You may also repurchase the firm’s own equities worth $50 million.

Defector, the following is what you have done with your business:

Capital Structure and Firm Scale 2

Indeed, the reality is not perfect like M & M.

For instance, if the investors in the real world believe- your organization suffers terribly from every conflict among agencies so you may end up wasting their money. They will surely react in a negative way to the increase in extra money $200 million available to all managers.

Capital Structure and Firm Scale 3

However, if those investors have beliefs in higher debt to equity proportion will be able to save the firm; they might react in a positive way to this same increase in the proportion.Therefore, as a CFO, one should consider every valuable effect.But a lack of knowledge about our specific firm makes it hard to comes to a decision whether the markets will look favorable or not for the changes in capital structure.

Necessary notification: No managers can accept the structure of capital as a one-dimensional way. It is intimately linked with the firm size. The directors control the outcomes to some extent.

There is another unusual effect of capital structure. It is the difference between dividends and repurchases.

Capital Structure and Firm Scale 4


Links of Previous Main Topic:-

Links of Next Financial Accounting Topics:-

How We Help With Homework

Our Workflow

Step 1

Submit your homework

  • Describe your task requirements, and set the deadline using our online form.

Step 2

Connect to qualified tutors

  • Receive instant quotes from experts. Pay using secure payment gateways.

Step 3

Get accurate solutions

  • Receive plagiarism-free solutions in your mentioned deadline. Unlimited free revisions included.

  • NHonest Pricing
  • NBetter Grades
  • NMoney-back Guarantee

Get Started with Help on Homework

Your Benefits

subjects covered

70+ Subjects

Our team of professional academic writers are experts in their fields and are well-equipped to handle any complex subject. You can always count on one of our specialists to assist you.

short deadline

Short Deadlines

We understand the importance of meeting deadlines and we pride ourselves on being able to deliver tasks quickly. No matter how tight the deadline, we will complete your homework on time.
chat with expert

Chat with Expert

Stay in touch with your expert by utilizing our secure chatboard for all your queries and concerns. You can easily check progress and make sure your work is on the right track.
free revisions

Free Revisions

We strive to ensure complete customer satisfaction. We offer free revisions to make sure our clients are happy with the final product. Your satisfaction is our top priority.

High Student Satisfaction

70% Repeat Customers

five star rating
help with homework

Frequently Asked Questions (FAQs)

Our Answers to Your Questions


How do I submit my assignment?

Getting assignment help is very simple with us. Students can either send us the homework via email or they can upload it to our online form here. For a quicker response, You can also chat with us at WhatsApp and submit homework directly. You are sure to get a response from our side within 10 minutes. You can pay for your order using secure PayPal or major credit card gateways.


Who will do my homework?

All our tutor experts are highly qualified professionals – holding at least Master’s degree in their fields. Currently, our tutor pool is made of 400 subject-specific experts.

Each expert has been individually chosen after a series of rigorous screen tests, which involves credential checks, work history analysis, writing sample assessment, and one-on-one interviews.


How much will my homework cost?

Each assignment is quoted a unique price. It is based on (i) complexity of task, (ii) your deadline and (iii) tutor’s estimate of the time it will take them to complete your homework. There are no obligations, and you are free to discuss the price quote with the tutor.

We also accept partial payment to start working on your assignment help. You can pay the remaining amount when your task gets completed. No pressure of up-front payment. No hidden order costs. We do not have a monthly fees or minimum payments for services.


Can I pay someone to help me with my homework?

Yes, you can pay online tutors for homework help. There is nothing wrong with asking for help from trained and professional subject tutors to clarify doubts regarding any assignment or coursework.


What mode of payment is acceptable?

There are several ways to pay for homework help:

  • Credit/Debit Card: You can use your credit or debit card to make a payment online. We accept VISA/MASTERCARD/AMEX.
  • PayPal is a secure online payment service that allows you to pay for essay writing services using your account balance or linked bank account.


Can I chat with my tutor?

Using our secure chat board, you can now chat directly with your assigned tutor. The chats are encrypted both ways to secure your privacy. This makes your contact with the tutor directly & confidentially, so you can better explain any requirements or changes if needed or just need updates.

You can't contact the experts outside of chat board platform. Sharing any personal information, including but not limited to contact information, goes against our Terms and Conditions and therefore may result in permanently blocking you from the platform. We take any personal data very seriously and we do it for the safety of our users.

Know more about chat board here.


Can I get free online homework help?

Our homework services are not free because we provide customized, high-quality homework solutions. We have a prepaid system that ensures professional homework helpers are paid fairly for their work and time. We believe that the value of their expertise and the effort they put into crafting each assignment justifies the cost of our service.

Is My Homework Help Legit?

My Homework help is absolutely legit! We are the leading providers of college homework services since 2012. We connect you with experienced tutors for your assignment and make sure you get completed answers before deadline. Our guarantee is high-quality assignment solutions or your money-back. It’s that risk-free! Furthermore, everything about you is kept confidential.


Can I trust you for homework help?

My Homework Help is absolutely reliable. Students of the world's top universities use our services and 50% of our customers are repeat customers. Our ordering process is very simple & transparent. There are no hidden fees or subscription anything like that. You can also request a refund if you think that our expert wasn’t able to meet your requirements. Your prime satisfaction is our end goal!

Know more - How it works


What about privacy & confidentiality?

Using My Homework Help is absolutely safe. We care about your security, therefore we encrypt all personal data to make every user feel safe while using our services and we don’t share any personal information with any third parties without your permission. Your credit card information is not stored anywhere at My Homework Help, and use of PayPal relies on their secure payment networks. Your identity, payment and homework are in safe hands. You can always be certain of getting professional help and remaining anonymous, while using My Homework Help.