Question

Describe how a technology firm and a utilities company may have a different capital structure. If you were to fund a start up company, would you raise capital through issuance of debt? WHY OR WHY NOT?

Answer 1

1.utility business is more asset-heavy than a technology company.

Generally, the capital structure of the business: Asset heavy business should has more debt than compared to an asset-light business.

As debt is the least costly source of finance.
It has more debt to fund it's existing heavy business equipment needs.

2. would you raise capital through the issuance of debt?

It depends upon the nature of the business, projected cash flow and the number of years before turning profitable.

We need to look at the advantages and disadvantages of debt financing to raise capital through the issuance of debt.
Long term Debt Financing.

Advantages:

1. Debt is the least expensive source of long-term financing.

2. It gives you flexibility in your capital structure.

Disadvantages:

1. Debt usually has a fixed maturity date. Thus a provision for repayment of debt must be made.

2. There is a permanent burden to the company on Interest payments.