If a company is in the midst of hard times ( e.g_ _losing money, cash shortfall)...
If a company is in the midst of hard times ( e.g_ _losing money, cash shortfall) do you think it is easier to initiate restructuring with a capital structure weighted more towards equity, debt or a balance of both? Explain why or why not.
Homework Answers
In hard times, the cost of capital increases due to the perceived risk profile of the firm. In such a situation, the higher weight assigned to debt means higher interest payment and hence even more risk of bankruptcy. On the other hand, the cost of equity is lesser than the cost of debt and does not have any obligation of declaring a dividend. Hence, to initiate restructuring, if the capital structure is weighted more towards equity, it is easier than for a firm whose capital structure is weighted more towards debt.
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If a company is in the midst of hard times ( e.g_ _losing money,
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