Consider the following statement: "Whether a company is domestic or international, the size of the company is not important. No matter if it is a large corporation or a small business, what does matter is the capital structure - it always has and always will." Do you agree? Why or why not? Propose the techniques and examples to support your position
Q4
Although there are shorter "versions" of a value proposition development, let's apply the original Michael Lanning five questions (Carroll, 2015).
For this forum address the following:
1. The five questions:
• "Who are the target customers? (Carroll, 2015, para. 21)" – Describe the customers who would be interested in the product or service.
• "What is the timeframe? (Carroll, 2015, para. 22)" – How long will your product or service address the need or pain point of the customer?
• "What do you want these target customers to do? (Carroll, 2015, para. 23)" – Are you looking for the customer to purchase the product or service? Resell the product or service? Does the product or service need to be used in a specific way?
• "What are their competing alternatives? (Carroll, 2015, para. 24)" - Who are the competitors? What do they are offer to the customer?
"Whether a company is domestic or international, the size of the company is not important
Export to SheetsFactor Small/Domestic Company Large/International Corporation Impact on Capital Structure Access to Capital Limited to local banks and private equity; high information asymmetry for public markets. Global access to large bond markets, diverse equity investors, and syndicated loans. Small/Domestic: Often relies heavily on equity (owner capital) or short-term debt due to restricted access and higher cost of long-term debt. Cost of Financial Distress High probability of bankruptcy; distress costs (e.g., loss of customers) are proportionately higher. Lower probability of bankruptcy; diverse operations can absorb local shocks; can often reorganize rather than liquidate. Large/International: Can tolerate higher leverage (debt) because its lower, diversified risk profile reduces the probability and relative cost of financial distress. Agency Costs Owner-managers minimize agency costs of debt/equity due to direct control. Separation of ownership and management creates significant agency costs, requiring monitoring. International: Complex subsidiaries and diverse operations amplify agency costs, requiring tailored governance structures which, in turn, affect financing choices. Tax Environment Subject only to domestic tax laws. Subject to multiple, complex tax jurisdictions, requiring specialized debt structuring (e.g., placing debt in high-tax countries to maximize the tax shield). International: Uses intracompany debt and sophisticated tax planning, which domestic companies cannot access, leading to unique capital structures driven by global tax efficiency.
Techniques and Examples Supporting the Position
1. The Pecking Order Theory (Size Factor)
The Pecking Order Theory suggests firms prefer internal financing first, then debt, and equity as a last resort. This theory is heavily supported by the reality of small and mid-sized firms.
Technique: Internal Funds Priority. Small, private domestic companies often have volatile cash flows and high information asymmetry, making external financing costly.
Example (Small Business): A small, local manufacturing company will almost always use its retained earnings to fund a new piece of equipment. If those funds are insufficient, they'll seek a bank loan. Issuing public equity is usually impossible or prohibitively expensive, leading to a capital structure heavily reliant on retained earnings and local debt, supporting the importance of size.
2. Diversification and Risk (International Factor)
Geographic diversification reduces unsystematic risk, making large international firms fundamentally less risky and able to support more debt.
Technique: Debt Capacity Analysis. The ability of a firm to service debt is a core component of capital structure. A diversified international company has more stable and predictable global cash flows.
Example (International Corporation): A large multinational like Nestlé or Coca-Cola can issue corporate bonds globally (e.g., in Euros, Yen, and Dollars). If one market (domestic) experiences a recession, cash flows from other markets provide stability. This diversification allows them to maintain a higher debt-to-equity ratio than a single-country beverage company, supporting the importance of international scope.
Sample Answer
I disagree with the statement that the size and domestic/international status of a company are not important when considering its capital structure. While capital structure is universally critical, the optimal structure and the ability to achieve it are fundamentally influenced by a company's size and geographic scope.
Why Size and Scope Matter to Capital Structure
The optimal capital structure—the mix of debt and equity—is determined by trading off the tax shield benefit of debt against the costs of financial distress. A company's size and operating scope significantly impact both sides of this trade-off: