PLANNING THE FINANCIAL

STRUCTURE

Christian Neil A. Ramos, MBA, CIA

Faculty, BSBA – Financial Management
OUTLINE

◦ Financial Structure
◦ Private VS Public
◦ Debt VS Equity
◦ Debt to Equity Ratio
◦ Debt Financing
◦ Equity Financing
◦ Alternative Forms of Financing
What is Financial Structure?

◦ Financial structure refers to the mix of debt and equity that a company uses to finance its
operations. This composition directly affects the risk and value of the associated business.

◦ The financial structure of a company can also be referred to as the capital structure. In some
cases, evaluating the financial structure may also include the decision between managing a
private or public business and the capital opportunities that come with each.
Private VS Public

◦ Private equity is created and offered using the same concepts as public equity but private
equity is only available to select investors rather than the public market on a stock exchange.
◦ Private companies can also go through multiple rounds of equity financing over time which
affects their market valuation.
◦ Companies that mature and choose to issue shares in the public market do so through the
support of an investment bank that helps them to pre-market the offering and value the initial
shares
Private VS Public

◦ All shareholders are converted to public shareholders after an IPO and the market
capitalization of the company is then valued based on shares outstanding times market price.
◦ Debt capital follows similar processes in the credit market with private debt primarily only
offered to select investors.
Debt VS Equity

In building the financial structure of a company, financial managers can choose between either
debt or equity. Investor demand for both classes of capital can heavily influence a company’s
financial structure. Ultimately, financial management seeks to finance the company at the lowest
rate possible, reducing its capital obligations and allowing for greater capital investment in the
business.
Debt VS Equity

◦ Debt includes a loan or other borrowed money that has an interest component associated with
it which is periodically paid till the borrowed amount is fully repaid.
◦ Equity refers to diluting the owner’s stake in the company and selling it to investors. Equity
investor does not need to be paid interest like debt. Rather, the profit earned by a company is
attributed to them as they own a share in the company and are part owners. Profit is distributed
through dividends paid by the company to its investors.
Debt-to-Equity (D/E) Ratio

Debt-to-equity (D/E) ratio is used to evaluate a company’s financial leverage and is calculated
by dividing a company’s total liabilities by its shareholder equity. D/E ratio is an important
metric in corporate finance. It is a measure of the degree to which a company is financing its
operations with debt rather than its own resources.

•Debt-to-equity (D/E) ratio compares a company’s total liabilities with its shareholder equity
and can be used to assess the extent of its reliance on debt
•D/E ratios vary by industry and are best used to compare direct competitors or to measure
change in the company’s reliance on debt over time
Debt Financing vs. Equity Financing

When financing a company, "cost" is the measurable cost of obtaining capital. With debt, this is the interest
expense a company pays on its debt. With equity, the cost of capital refers to the claim on earnings
provided to shareholders for their ownership stake in the business.
Debt Financing
◦ When a firm raises money for capital by selling debt instruments to investors, it is known as debt
financing. In return for lending the money, the individuals or institutions become creditors and receive a
promise that the principal and interest on the debt will be repaid on a regular schedule.
Equity Financing
◦ Equity financing is the process of raising capital through the sale of shares in a company. With equity
financing comes an ownership interest for shareholders. Equity financing may range from a few thousand
dollars raised by an entrepreneur from a private investor to an initial public offering (IPO) on a stock
exchange running into the billions.
Alternative Financing

Not all entities (banks, stock, bond markets, etc.) are willing to finance certain companies for
various reasons. For example, Company A is a 2-year-old company that has a technology that
will not be ready for market for another 6 years. A bank most likely will not fund that project
because there is no revenue for 8 years and there is no guarantee that the company is ever going
to be successful
Alternative Financing

Crowdfunding

◦ Crowdfunding is the most public form of alternative financing. It’s simply an online platform
where many investors invest small amounts in a company. Popular crowdfunding sites include
Kickstarter, Indiegogo, and GoFundMe. This is a great option for companies that have
customers who want what they have but the bank does not agree.
Alternative Financing

Grants

◦ Grants do not have to be paid back, unlike a loan. They are usually disbursed or gifted by one
entity. Often, that entity is a government department. It could also be a corporation, trust, or
foundation. Most grants require an extensive application process. In addition, most grants are
designated for a specific purpose – like research and development.
Alternative Financing

Private Equity

◦ Private Equity firms are funds, and a team of individuals manages this fund that provides debt
and equity to businesses. Usually, the “hold” period for the investment can be anywhere from
3-7 years. The Private Equity (“P.E”) firms bring best practices and find synergies with other
portfolio companies to streamline costs.
THANK YOU!!!