Capital Structure and Funding Methods: A Guide for Olively.com's Potential Public Offering

Methods for Raising Capital: Debt vs. Common Equity

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The management of Olively.com, an online research network, are considering becoming a public company. At a lengthy meeting with the board of directors, the

CEO of Olively.com details his idea as to methods in which the firm should raise capital. In his discussion, the CEO states that "45% of new capital should come from debt, leaving 55% to come from the issuance of common equity. We will disregard issuing preferred stock at this point." In the simplistic sense, the CEO of

Olively.com is detailing which of the following?

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A. B. C. D. E.

B

In this example, the CEO of Olively.com is detailing his idea of the company's target capital structure. The target capital structure can best be thought of as the proportion of debt, common stock, and preferred stock that the firm plans to issue in its effort to raise capital. The "optimal capital structure" is defined as the capital structure that balances risk and return, thereby maximizing the firm's stock price.

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