5. Capital Structure: Borrow It!

We now take our first step in explaining capital structure. As outlined in Chap. 1, this is essentially a fancy way of categorizing the specific mixture of debt and equity a firm chooses to finance firm operations. One should view capital structure in two ways. First, we need to examine the firm’s existing capital structure. Doing so is the specific objective of the next two chapters of this text. However, the real issue regarding capital structure is identifying the firm’s ideal mixture of debt and equity to use in financing the firm’s projects. This latter notion is critical in understanding corporate finance and will be covered in detail much later in our journey. In this chapter, we will start with the debt side of the firm’s existing capital structure.