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(^328) Financial Management
Table: Inventory of Resources
Capital Structure Policies in Practice
There is clearly some value to debt financing, and firms use different amounts of debt
depending on their tax rates, their asset structures, and their inherent riskiness.
Unfortunately, capital structure theory does not provide neat, clean answers to the
question of the optimal capital structure. Thus, many factors must be considered when
actually choosing a firm's target capital structure, and the final decision will be based on
both analysis and judgement.
If a firm has perpetual cash flows, then a relatively simple model can be used to value
the firm at different capital structures. In theory, this model can be used to find the
capital structure that maximises the firm's stock price. However, the inputs to the model
are very difficult, if not impossible, to estimate. Further, most firms are growing, so they
do not have constant cash flows.
Resources Available for use within
One quarter One year Three years
Uncommitted reserves
Instant reserves
Surplus cash $
Unused line of credit $
Negotiable reserves
Additional bank loans
Unsecured $
Secured $
Additional long-term debt $
Issue of new equity $
Reduction of planned outflows
Volume-related
Change in production Schedule $
Scale-related $
Marketing program $
R & D budget $
Administrative overhead $
Capital expenditures
Value-related
Dividend payments $
Liquidation of assets
Shutdown $
Sale of unit $
$ $
$ $
Total resources $