1. What is Capital Financing
So let's now discuss capital financing, which is the type of funding which
is used to finance the purchase of an asset or a project or
an investment, and we can use any mix of equity and debt.
Now, we've already discussed the idea that investing in new projects increases
the assets for a company. Well, this would then mean that the liabilities
and/or the equity of that company would also need to increase.
So in the earlier part of the course, we looked at capital investment,
but now, if we're considering the mix of debt and equity,
we're now talking about capital financing, ie, where the money comes from.
So our focus now needs to be on the mix of debt and
equity. For instance, we may choose to finance a project using more debt
than equity, or we may also decide that it's better to use more
equity than debt. Our focus needs to be on this balance,
and how to calculate what is optimal for the company and its shareholders.
2. Let's practice!