Capital structure decisions can impact a company's profitability from "summary" of How Finance Works by Mihir Desai
Capital structure decisions are a crucial aspect of a company's financial strategy. These decisions involve determining the mix of debt and equity that a company uses to finance its operations. The way a company chooses to structure its capital can have a significant impact on its profitability. When a company decides to use more debt in its capital structure, it can benefit from the tax advantages of debt. Interest payments on debt are tax-deductible, which can lower the company's tax liability and increase its profitability. However, using too much debt can also increase the company's financial risk, as it will have to make regular interest payments regardless of the company's performance. On the other hand, if a company relies more on equity financing, it may have a lower risk of financial distress because it does not have to make fixed interest payments. However, issuing more equity can dilute existing shareholders' ownership and reduce their share of future profits. This can impact the company's profitability in the long run.- Cost of capital, and growth prospects, managers can make informed decisions about the optimal capital structure for their company. Ultimately, the capital structure decisions that a company makes can have far-reaching implications for its profitability and long-term success.
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