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Consider the following statement: "Whether a company is domestic or international, the size of the company is not important. No matter if it is a large corporation or a small business, what does matter is the capital structure - it always has and always will." Do you agree? Why or why not? Propose the techniques and examples to support your position
Export to SheetsFactor Small Company (e.g., privately held startup) Large Corporation (e.g., publicly traded multinational) Access to Debt Limited; relies on bank loans or private funding. Debt is often expensive and requires personal guarantees. Extensive; can issue corporate bonds (public debt) globally with lower interest rates due to higher credit ratings. Access to Equity Limited to founders, angels, or venture capital (VC). Equity is often ceded at high cost (high stake for little capital). Can issue common stock and preferred stock through liquid public markets (IPOs, secondary offerings). Risk & Volatility Higher, making its cash flows less stable. This limits its capacity for high debt. Lower due to diversification (product lines, geography), allowing it to sustain a higher debt-to-equity ratio.
Technique and Example:
Trade-off Theory: The optimal capital structure balances the tax shield of debt with the cost of financial distress. A small company reaches the point of financial distress (bankruptcy risk) much sooner than a large, diversified corporation. Therefore, a small company's optimal structure will always have significantly less debt (a conservative structure) than a large company. A large corporation can safely employ a higher degree of leverage to maximize its tax benefits.
I disagree with the statement that the size of a company is not important and that only capital structure matters, regardless of size or whether the company is domestic or international.
While capital structure is undeniably crucial, company size and international status significantly impact the optimal capital structure and the techniques used to manage and evaluate it.
Company size is critical because it dictates access to capital markets and the cost of financing.