The company either uses Equity including common stock, preferred stock or retained earnings or Debt including bonds or loans to fund the capital requirement of the company.
Equity and Debt both are required by the company in correct proportion weighed on the basis of the optimal value of the cost of capital. After analyzing the pros and cons of both investment types and the financial needs of the company, the advisers come up with the right mix of debt and equity that is optimal for the company’s capital structure.
Debt investments are riskier for the business while less risky for the investors as they get the compulsory interest and principal repayment for their loan. They can also sell the assets of the company in the time of bankruptcy to recoup their fund. As they share less risk, they get lower returns and no ownership rights in the business undertakings. The more debt financing a firm uses in its capital structure, the more financial leverage it employs.
Equity investor shares the ownership of the company and rights to potential future profits. As concluded by various researchers that 90% of startups fail within 5 years of inception, thus equity investors share a high risk of loss and demand a high rate of return against their investment. Equity investors also get only the residual value after debt investors are repaid hence, implied cost of equity is greater than that of debt.
StartupMinds takes time to understand the financial health of the client’s business and then suggest an optimal mix of the debt and equity required for the long term growth of the organization.
Capital Structure planning is required by different sizes of companies for different financial events with the same motive of increasing profitability, minimizing the cost of capital, maximizing the firm’s value and optimum utilization of funds. Factors that influence capital structure planning are the nature and size of the firm, stability of revenue generation, expected future cash flows and flexibility of financial structure amongst others.
What We Do
What We Do
StartupMinds’s core competency lies in profound financial expertise with which we guide you through the process of recapitalization with ease. Our approach of business diagnostics coupled with the precise knowledge of various financial techniques allows us to consult you on the right mix of debt and equity which would be in line with the long-term goals of the organization and assist in keeping the optimal cost of capital.
Capitals are utilized by the company to either fund the operations, assets requirement, growth or economies of scale. The company must tradeoff between the debt and equity to determine the optimum capital structure. Capital structure planning also helps us to evaluate the strength of company’s financial statements. A balance sheet is considered to be healthy if it has more equity and less debt. A very high leverage ratio might affect the smooth running of the business as they will have to bear steep interest cost and creditors might not allow you to take higher risk.
Restructuring services are required by the business for generally improving the overall profitability or while fundraising, Merger, and Acquisition, Leverage buy-outs et al.
StartupMinds evaluates the current state of operation, nature, and size of the business, the purpose of financing, legal requirements and current cost of capital to suggest measures for future improvement, maximization of return, minimizing the cost and risk, fully utilize the available capital, maintain liquidity and flexibility of financing while preserving the control of the business.
We work extensively towards the growth of our clients by providing periodic in-depth insights and financial analysis along with a plan of action to get ahead of the competition and pave a path to success.