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Discuss the two common components of a firm’s capital structure. Does

a firm need both components? If you were a business owner, which component is most important? Why?

Two-Component of a Firm’s Capital Structure

Every firm depends on the capital structure for a successful production. Capital structure is the proper allocation of cash flow in two categories; debt and equity. It is imperative to have a clear understanding of the two components of capital structure are essential to ensure the long-term source of finance in a company. Both equity and debt are crucial to the stability of the capital structure in a firm as they act as a measure firm’s permanent financial asset. Nonetheless, the two components vary in importance to a firm owner. Thus, it is imperative to understand which of them a firm owner will value more than the other.

The amount of capital allocated on debt or equity depending on a firm’s financial policy and creditworthiness within the market. For instance, if I were a business owner, I would value equity share capital to debt. A good entrepreneur should have an understanding of his or her business creditworthiness within the market before investing a large amount of capital in it. Notably, the creditworthiness of a company gradually becomes complex. Thus, it is essential to invest more capital in the equity share than debt at the beginning of the business. However, as the business grows, then the owner should allocate capital equally between the two components of the firm to ensure long-term growth.

References

Trisha. (2014, December 5). Capital structure: Concept, definition and importance. Retrieved August 30, 2020, from Your Article Library website: https://www.yourarticlelibrary.com/financial-management/capital-structure/capital-structure-concept-definition-and-importance/44063