Capital Structure and Risk

When I try to explain capital structure to someone, I usually make it  personal. For example, when they purchased a car or need a mortgage they had to make a decision between how much to borrow and how much cash to put down. This is the type of thinking that everyone who makes a large purchase goes through. They weigh the pluses and minuses of both the debt and  cash. They realize for example they can usually buy a more expensive car or bigger house if they have more debt and use a lot of their cash. They also realize that if their income in the future is not what they expect this could have drastic effect on their lifestyle. Essentially when you think about that you need you think  about risk. The more debt the more riskier you are. Most people look at debt as a negative, however I think it’s more complex than that. Think of a family that needs a bigger house because they have a growing family. They cannot afford it based on their income and cash they have the bank, but if they borrow they can afford to have the extra bedroom and the extra bathroom. In addition, having debt makes you more conscious and more alert as to your spending habits and income opportunities. If you have a lot of cash in the bank, people have a tendency to become lazy and waste the cash.