discussion

Post 1 : 

Paige Lane posted Feb 9, 2022 1:44 PM

Hello Class and Professor,

 

How does a firm’s capital structure relate to your personal capital structure?

 

A firm’s capital structure is its financial mix of equity and debt. Firm’s need capital structure for daily operations to work toward the strategic goal of maximizing a firm’s value. This is related to personal capital structure because personal finances include a mix of equity and debt.  

 

 

In what ways are they similar?

 

A firm’s capital structure and personal capital structure are similar. The first way they are similar is through an assessment of risk. Before a firm or a personal can increase the amount of debt in their capital structure, the lenders assess the risk. For a firm this would be an assessment of the firm’s risk before approving a business loan. For an individual, their risk would evaluate the risk using a credit score before getting approved for a personal loan such as a car or housing loan. Another similarity is each capital structure has a group of debt sources and a group of equity sources. These sources provide the financing a firm or individual need for daily operations or activities. A final similarity is that these firms and individuals will likely put money down before raising more capital. 

 

 

Provide examples of how you use debt and equity in your personal financial life that parallels the basic capital structure decisions made by a firm.

 

An example of how I use debt and equity in my personal financial life that parallels the basic capital structure decisions made by a firm would be when I purchased my first new car. When getting my car, I was a new college student with no credit history and a small amount of assets. Because of this, increasing my debt was a risk to myself, but the dealership viewed me as a high-risk individual as well. Before getting the loan, I had to put money down and accept a high interest rate, acting as the premium for being a high risk for the dealership. At this point, I had to assess the risk of investing in this large purchase. Overall, I concluded purchasing Overall, I concluded purchasing this car was essential for my job and education, making the benefits outweigh the risk. 

            This parallels the basic capital structure decisions made by a firm because a firm with a concerning amount of debt would be viewed as high risk and would need to pay a premium to any lenders to compensate for this risk. The firm would then need assess the project, its benefits, and how it would increase the value of the firm before taking on the additional debt if they chose not to increase equity by raising capital through issuing stock. If the firm concludes the project would be beneficial to the firm’s value, the benefits will outweigh the risk thereby making the premium expense worth paying. 

 

Best,

Paige

Post 2:

Adam Wilcox posted Feb 10, 2022 5:56 PM

The Firm’s and Your Personal Capital Structure

1.  How does a firm’s capital structure relate to your personal capital structure?

My personal capital structure doesn’t include much equity, so the majority of my financing is done through debt. If equity equals assets minus liabilities (Rollenhagen, n.d.), I have equity in the form of the market value of my assets. I can sell them and make cash. My income adds cash flow, so that helps a lot, but it is not enough. It is good that I can take on debt to pay for the things I want and need, and I’m awarded with good credit when I meet the criteria, which motivates me more to do the right thing. A firm’s capital structure has far more equity than I do because they are so large. Plus, if they are a corporation, they have shareholders which can add tremendous wealth to their capital structure. 

2.  In what ways are they similar?

My capital structure is similar to a firm’s in that we both have debt. Debt is necessary to get by in the world if you want to get lots of goods and services now instead of later. It speeds up the economy and people’s growth, so there’s more prosperity faster. If the money is used wisely there will be fewer problems, and both I and a firm have to deal with systematic risk like the economy, political climate, and social climate that are hard to impossible to control. 

3.  Provide examples of how you use debt and equity in your personal financial life that parallels the basic capital structure decisions made by a firm. 

I’ve never used home equity, and all my cash has come from income and issuing debt. My whole capital structure consists of debt, unless you count the equity that results from subtracting my liabilities from my assets. I could sell a bunch of my stuff and make cash, but that’s not as liquid as I like it. It is hard to find buyers in the first place, let alone someone who’ll give you a good price. Both I and a firm have to plan our finances and decide what to do with our money through budgets, so there are some similarities. But I’m puny compared to them. 

Adam

References

 

Rollenhagen, L. (n.d.) What is equity? Definition & examples. Wealthsimple. 

 

https://www.wealthsimple.com/en-ca/learn/equity-definition