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A framework for evaluating capital structure

J B Sterns1, T K Majidzadeh

  • 1Ziegler Securities, Chicago, Illinois, USA.

Journal of Health Care Finance
|January 1, 1995
PubMed
Summary

This article explains why businesses use variable rate debt and how much to borrow. It covers interest rate trends, risks, and the financial statement effects of this financing strategy.

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Area of Science:

  • Finance
  • Corporate Finance
  • Risk Management

Background:

  • Understanding the motivations behind variable rate debt acquisition is crucial for financial strategy.
  • Historical interest rate dynamics influence the decision-making process for corporate borrowing.
  • Prudent asset-liability management necessitates an evaluation of liquidity requirements when using variable rate debt.

Purpose of the Study:

  • To elucidate the rationale and optimal amount for accessing variable rate debt.
  • To analyze the historical context and motivations for incurring variable rate debt in specific interest rate environments.
  • To assess the inherent risks associated with variable rate debt and the liquidity reserves needed for effective management.
  • To detail the impact of variable rate debt on financial statements.

Main Methods:

  • Exploration of historical interest rate relationships.
  • Analysis of motivations for variable rate debt utilization.
  • Assessment of variable rate debt risks and liquidity needs.
  • Examination of financial statement implications.

Main Results:

  • Identifies specific interest rate environments that incentivize the use of variable rate debt.
  • Outlines the critical role of liquid resources in mitigating risks associated with variable rate debt.
  • Details the effects of variable rate debt on key financial statement metrics.

Conclusions:

  • Variable rate debt offers strategic advantages in certain interest rate scenarios but requires careful risk management.
  • Adequate liquidity is paramount for successful asset-liability management when employing variable rate debt.
  • The financial statement impact necessitates thorough understanding for accurate reporting and analysis.

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