Financing Does Not Fix the Business
Explain why capital structure decisions must start with operating cash flows and real-world frictions.
Financing changes claims before it changes value. Start with the clean world Modigliani-Miller says that in perfect markets, firm value is driven by operating assets, not by whether those assets are financed with debt or equity. The point is not that real markets are perfect. The point is that every claimed financing benefit needs a named real-world reason. Name the friction Debt may add value through tax deductibility or discipline. Debt may destroy value through default risk, covenants, supplier concern, employee churn, and reduced flexibility. Equity may preserve resilience but dilute owners and send a signal. Hybrids move risk between…
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