Final answer:
Determining the optimal capital structure is crucial for a financial manager as too much debt can lead to failure due to high interest payments, while too little can prevent growth. A company must balance its need for control against the cost of interest payments when choosing between debt and equity financing. As companies establish themselves, investor confidence grows due to widely available company information, easing the process of obtaining capital.
Step-by-step explanation:
It is true that a financial manager must carefully determine the optimal capital structure for a company. Excessive debt can burden a company with interest payments that it may not be able to afford, potentially leading to insolvency. On the other hand, insufficient debt may cause a company to miss out on investment opportunities, potentially stunting its growth and also putting its future at risk.
When accessing financial capital, a firm has options such as borrowing from banks, issuing bonds, or selling stock. Borrowing allows the company to maintain control, as it does not involve selling ownership to shareholders. However, it requires the firm to make consistent scheduled interest payments. Issuing equity, while potentially diluting control, does not commit a company to these scheduled payments, and can be an appealing option when a company's prospects are promising and information on its performance is readily available to investors.
As a firm becomes established and its strategy is likely to lead to profits, outside investors become more willing to provide capital because the need for personal knowledge of the firm's managers lessens. Large amounts of information regarding a company's products, revenues, costs, and profits become accessible to potential investors, increasing their comfort level in providing financial support.