Making choices about how a company is funded can really affect how much shareholders value their investment. Here are a few key ways this happens:
Cost of Capital: When a company has a smart mix of funding sources, it can lower its overall costs. This helps the company make more money. For example, if a company swaps out costly equity for cheaper loans, it can increase its returns on equity (ROE).
Risk Management: Using debt can boost returns, but it also comes with more financial risks. If a company's earnings go up and down a lot, taking on more debt can make those returns less stable. This can make shareholders worry.
Tax Benefits: The interest a company pays on its debt can be deducted from taxes. This acts like a shield that helps increase the company's net income. For example, if a company has 50,000 each year on taxes.
Market View: Companies that maintain a well-balanced funding structure appear more stable. This can attract investors, which often leads to higher stock prices.
Making choices about how a company is funded can really affect how much shareholders value their investment. Here are a few key ways this happens:
Cost of Capital: When a company has a smart mix of funding sources, it can lower its overall costs. This helps the company make more money. For example, if a company swaps out costly equity for cheaper loans, it can increase its returns on equity (ROE).
Risk Management: Using debt can boost returns, but it also comes with more financial risks. If a company's earnings go up and down a lot, taking on more debt can make those returns less stable. This can make shareholders worry.
Tax Benefits: The interest a company pays on its debt can be deducted from taxes. This acts like a shield that helps increase the company's net income. For example, if a company has 50,000 each year on taxes.
Market View: Companies that maintain a well-balanced funding structure appear more stable. This can attract investors, which often leads to higher stock prices.