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After reading this article I have learned about capital structure and its importance. The article has explained capital structure as the ratio or proportion of debt and equity. The debt in the capital structure is the amount that company has taken from the external parties which have fixed repayment or can be called any time. The equity on the other hand is the money that has brought in by the shareholder and the owner of the business.

The proportion of these two forms of financing is called capital structure. It is very important aspect of the business for the reason that it determines the riskiness of the business. The reason that can be sighted is that the owner’s capital has no fixed repayment and no fixed interest that is charged on it. This is the money that is invested by the owner at their own risk however the other form of money which is debt has risk for the business and limited risk for the owner. The reason for the same is that the debt has fixed repayment that has to be made at regular interval.

Debt financing enables you to keep full responsibility for business. With full proprietorship comes finish control. Value financing is an interest in the proprietorship privileges of the organization. That is, value financial specialists get a segment of profit. In the event that there is no profit, value financial specialists aren’t paid. Be that as it may, obligation financial specialists must be paid regardless of what happens. Inability to pay intrigue can bring about a default, which brings about a credit occasion. Thusly, capital structure betters control and oversee operational adaptability.

The debt is taken against the assets of the company and the term of debt can be very harsh on the business. The term of debt includes the fact that business can be sold and assets can be liquidated to pay the dues of the business. Thus, the survival of the business depends on the fact that has it been able to make repayment or not.

The debt has some benefits too. The debt has interest expenses which brings down the profit of company. The business uses the money and then interest helps in cutting down the taxes this phenomenon is called tax shield where business is using this money to bring down the tax liability. However, this doesn’t mean business can take any amount of debt as debt also has distress cost and the optimal capital structure is where the distress cost and tax shield are equal.

In the article that I have read, it has taken 7 countries namely US, Canada, Japan, France, Germany, and Italy. The parameter that have been taken are debt to asset, debt to capital, debt to net asset and non-equity liability to total assets.

These all parameters indicate that what is the proportion of debt in the asset of the company and in the capital of the company. These parameters indicate that how much company has leveraged itself to fund these assets (Barker, 2002).

The study has been conducted to see if there are any similarities in capital structure of the companies and it has concluded that the G-7 countries have similar leverage level. This indicates that the borrowing of the firms is not very dependent upon the interest rate in that country as companies across the countries have relied on similar level of debt.

Thus, to justify the findings the author has taken co-relation as measure and has run the same to see if there is any co-relation between the various parameters of the public companies in these countries and author has surprised that there is fair degree of co-relation between these factors.

However, it has been seen that the model that have been used have not been able to explain the same as they should have and there is still a lot that needs to be done to ensure that model produces the result that are more accurate and related to reality (Lyandres, 2003).

The research though has indicated that in the long run all the firms tend to use similar level of debt on aggregate. This can be seen from the fact that some firms have higher level of debt and some are debt free thus on an average the leverage position of all the firms come to a situation that all the companies put together reflect similar level of leverage position.

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