Raising Financial Capital

• One of the principal problems of a corporate finance professional is raising financial capital to fund the business's operations. This is particularly important early in the life cycle of the company, when the business has not had sufficient time to fund its operations through internal revenue generation. Typically, a financial officer will attempt to generate income through a combination of debt, borrowed from lenders, and equity, contributed by owners. To attract capital from these sources, the company must convince these lenders and investors of the financial viability of the company.
  
  

Debt-to-Equity Ratio

• The relative contribution of debt and equity capital to the corporate financial structure of a company is illustrated in its debt-to-equity ratio. This ratio is commonly looked to by investors and potential investors as an indicator of the overall financial health of the company. Generally, the higher the ratio, the riskier the company is perceived to be by outsiders.
  
  

Raising the Debt-to-Equity Ratio

• In some instances, a financial officer may wish to raise the debt-to-equity ratio or, in other words, raise the proportion of debt relative to equity within a company. This is also known as increasing the financial leverage of the company. A company can do this by borrowing money -- thereby taking on debt -- and using that money to buy back shares of stock from shareholders -- thereby reducing the amount of equity.
  
  

Lowering the Debt-to-Equity Ratio

• Because a high debt-to-equity ratio is sometimes seen as a sign of poor financial health, some financial officers may be interested in lowering that ratio. The solution to the problem of a high debt-to-equity ratio is to issue additional shares of stock -- thereby increasing the amount of equity -- and use the money raised from selling those shares to pay off debt -- thereby reducing the amount of debt held by the corporation.