Financial Engineering of Capital Structure

As a firm embarks upon financial engineering of its existing capital structure to ensure achievement of the six key objectives of liquidity, cost, risk, flexibility, control and shareholder value, it must keep in mind the following important considerations.

• Leverage issue: how much change in debt and equity will be acceptable;
• Ownership issue: extent of enhancement/distribution of present holding of promoter/controlling group;
• Instrument: whether the existing or new instrument (debt/equity) should be deployed to effect the desired changes and to achieve the six objectives stated above;
• Training: if additional debts and /or equity is to be raised, what should be the right time (duly taking into account the state of capital and debt market and firm’s positioning in the minds of the prospective investors)?
• Pricing: to raise debt and/or equity for meeting the additional funds requirement for restructuring or to change debt-equity mix or for financing an organic expansion, at what level should the firm price its issue?
• Terms of control: what kind of control should the firm enter into with its suppliers of fund so as to ensure maximum flexibility (implying that restrictive clauses are to be kept to the minimum)?

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