Capital Structure

Capital structure allocates risk and financial rights between lenders and shareholders. The course examines leverage, tax benefits, distress costs, incentive conflicts and financial flexibility.

Course purpose

The decision examined

Debt redistributes cash flows and magnifies equity sensitivity; it does not transform a poor asset into a valuable investment. A sustainable structure must remain compatible with cash-flow volatility, maturities and future investment needs.

Objectives

Learning outcomes

Separate asset value from security value.
Explain leverage and equity risk.
Balance tax shields against distress and lost flexibility.

Concepts

Key concepts

Leverage
Tax shield
Financial distress
Agency costs
Target structure
Flexibility

Syllabus

Course structure

Assets and claims
Equity leverage
Taxation
Distress
Information
Flexibility

Extract

Analytical framework

Allocate value between capital providers

The value of operating assets V_A is financed by debt V_D and equity V_E:

Financing identity

V_A = V_D + V_E

This value identity does not imply that financing is neutral in every setting. Taxes, default, information asymmetry and contractual restrictions can change available cash flows or their risk.

Full course

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