Frequently Asked Questions About Structuring Finance

How is capital structure calculated?

Capital structure is the percentage that each capital component represents of the sum total of a corporation’s complete financing structure.

Why is it important to understand a corporation’s WACC figures?

Understanding a corporation’s “Weighted Average Cost of Capital” allows management to better understand the cost of each dollar of financing. Understanding the cost of financing allows the management team to make better choices when strategizing on how to raise capital.

How does the amount of working capital affect a business?

In order to be able to operate, a corporation must have enough working capital to pay its obligations and cover the costs of its financing. If a corporation’s current liabilities are greater than its current assets, it is described as having a working capital deficiency.

How is mezzanine debt different from other forms of capital?

Mezzanine debt is difficult for many to understand because it shares characteristics of both debt and equity financing. Mezzanine debt is a form of hybrid capital and is often used when restructuring the ownership of a corporation.

What does the term “leverage” mean when used in the context of financing?

A company is considered highly leveraged when its financial structure has a significant amount of debt financing. This high-level of debt signifies that financiers have leverage over the existing corporation.

When is mezzanine debt most commonly applied?

Mezzanine debt is often used during changes to a corporation’s financial structuring. Mezzanine debt can be easily converted into stock and often has characteristics of debt equity. This makes mezzanine debt attractive and financially rewarding but also poses a slightly high-risk for the lender.