COMMERCE 3FA3 Lecture Notes - Lecture 8: Capital Structure, Private Equity, Exit Strategy
11 Feb 2018
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Concept is that you (as an investor) can set your own capital structure for a company: you want to increase debt to equity ratio of a company. You would invest full in company shares and also borrow money and invest that too. Your personal debt to equity ratio has increased, creating same technique as if company increased their ratio: you like the (cid:272)o(cid:373)pa(cid:374)y (cid:271)ut you do(cid:374)"t (cid:449)a(cid:374)t the risk (cid:894)they ha(cid:448)e too much debt) You want to lower debt to equity ratio. You invest < in shares of the company. You put the rest of the money in something risk-free like t-bills. The book calls this part (part b), lending. (cid:862)you (cid:449)a(cid:374)t to le(cid:374)d part of your (cid:373)o(cid:374)ey out(cid:863) If a company is very profitable, then adding debt will improve return on equity. If a company is not very profitable, then adding debt will decrease the return on equity. They are reviewing two different capital structure options.
