Capital Structure

Dirk Schoenmaker and Willem Schramade
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Willem Schramade: Nyenrode Business University

Chapter 15 in Corporate Finance for Long-Term Value, 2023, pp 431-462 from Springer

Abstract: Abstract Capital structure is about the funding side of the company’s balance sheet and enables a better understanding of a company’s risk profile and health. We start from financial capital structure, which concerns the proportions of debt and equity in proportion to each other and the company’s asset base. These can be expressed in ratios such as debt/assets. We then consider theories that explain financial capital structure, such as the Modigliani-Miller (MM) theorems. Subsequently, we consider the capital structures of environmental (E) and social (S) separately. Companies generate assets and liabilities on E and S, as they do on the financial side. The main difference is that it is typically much less clear how strong the claims against the company are, and to what extent they will materialise in financial terms. However, their presence and size give strong indications of additional risk. The analysis of the capital structures of E and S allows us to take the next step, namely the construction of an integrated capital structure, which is the capital structure of F, E, and S combined. As found in Chap. 13 on the cost of integrated capital, liabilities on S and E can make the integrated capital structure riskier than the financial capital structure and raise the cost of integrated capital.

Keywords: After-tax cost of equity; Agency theory; Asset substitution; Balance sheet; Bankruptcy; Capital structure; Capital structure ratios; Company health; Conservation of value principle; Cost of capital; Cost of debt; Cost of equity; Cost of integrated capital; Costs of financial distress; Debt; Debt overhang theory; Direct bankruptcy costs; EBIT; Environmental capital structure; Equity; Equity issues; Financial capital structure; Financial distress; Free cash flow (FCF) theory; Homemade leverage; Information asymmetries; Integrated capital structure; Law of one price; Leverage; Market value balance sheet; Liabilities; Modigliani-Miller (MM) theorems; Optimal capital structure; Pecking order theory; Perfect capital markets; Risk profile; Social capital structure; Static trade-off theory; Tax deduction of interest; Tax shield; Unlevered; Unlevered cost of equity; Weighted average cost of capital (WACC) (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/978-3-031-35009-2_15

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