Mix of Debt and Equity

Topics: Debt, Corporate finance, Venture capital Pages: 24 (6793 words) Published: April 3, 2011




1. Definition of debt and equity4
a) Definition of Debt4
b) Definition of equity5
2. Example of mix structure capital5


1. Debt Financing – Pros & Cons11
a) Definition and Classifications of Debt Financing11
b) Advantages of Debt Financing14
c) Disadvantages of Debt Financing15
2. Equity Financing – Pros & Cons16
a) Definition & Classifications of Equity Financing16
b) Advantages of Equity Financing18
c) Disadvantages of Equity Financing19
3. The mixture of Debt and Equity20
a) Definition20
b) Why do virtually all companies choose to finance themselves by the mixture of debt and equity?22 c) What factors can affect the ratio of debt and equity of a company?22 d) Optimal Level of Debt-to-Equity24



In the age of Globalization and specially globalized economy, there are more and more people getting involved in doing business. Nevertheless, just a few can get succeed.

To be a successful entrepreneur, the first important thing you should care about is capital. “How can I raise fund for my business?”, “From whom can I get money to operate my company?”, “What kind of capital that suits my business best?”, etc…. are the very common questions to consider before setting up a business. An effective capital structure can help you to not only obtain your goals and reach succeed but also expand your business quickly and stably. However, it is not so easy to find out a good way of financing your company. Without a wise decision on capital structure, your business can be suffered and you will get loss as result. There is no specific formula for you to build the right capital structure, as it is affected by many factors.

Though this report can not show you exactly how to finance your business effectively, it aims to provide you the very first basic knowledge about some kinds of capital structure. Specially, as mixture of debt and equity is the most common and the most effective one, we are going to discuss more deeply on this structure.


Raising capital is the first thing to do when you want to start a business. However, things are not simple. You can simply spend your money on materials, labors, machinery and other expenses, and then simply use your profit to retain your business. But if you just act like that, due to severe competitions from your rivals, you will soon realize that your business can not be expanded, and it is even compressed compared to the market development. During the operation, sometimes you may need to borrow money from other organizations, and sometimes you want to put more power on the business by investing more of your own money on it. It is really important for you to keep considering the ratio between your money and others’ money that has been spent on your business, in other words, the ratio between owners’ equity and debt of your business. In fact, virtually all companies choose to finance themselves with mixture of debt and equity, but in different ratio.

So, why do they choose that kind of capital structure and what are the factors that affect on their decision?

This report can help you to answer these questions. The report is to provide you an overview about different kinds of capital structure through their definitions, types, pros and cons, and finally explain to you the reason why virtually all companies finance themselves with mix structure, as well as what factors are affecting on the level of the mixture.

Due to the diverse business environment, we can not tell you the right capital structure for your business. Even the capital structure itself can be changed so as to adapt with changing business conditions. We are going to just give you some basic information and knowledge that we believe can contribute to your wise decision.

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