"Whether a company is domestic or international, the size of the company is not important.

Sample Answer

Capital Structure: Size and Scope

I disagree with the statement that a company's size is unimportant to its capital structure. While capital structure is always a critical factor for any business, a company's size and whether it's domestic or international significantly influences the types of capital available and the associated risks.

Why Size Matters

A company's size fundamentally impacts its ability to access different forms of capital.

Large Corporations: Large, established corporations often have access to a wide range of financing options that are typically unavailable to smaller firms. They can issue corporate bonds on the public market, secure large-scale loans from international banks, or raise equity through a public stock offering. Their size and established credit history often translate to a lower cost of capital. They can leverage debt more effectively because their diversified revenue streams and assets provide greater collateral and lower risk in the eyes of lenders.

Small Businesses: Small businesses, in contrast, have much more limited options. They are often restricted to bank loans, angel investors, or venture capital, which can be more expensive and come with stricter terms. Their capital structure is usually much simpler, relying more on owner's equity or short-term debt. A small business with a high level of debt is inherently riskier than a large corporation with the same debt-to-equity ratio, as a single market downturn could jeopardize its entire operation.

Why Domestic vs. International Matters

The scope of a company's operations—domestic or international—also impacts its capital structure by introducing different levels of risk and opportunity.

International Companies: International corporations face complex currency risks, political instability, and varying legal and regulatory environments. For example, a company operating in multiple countries must manage different tax laws and accounting standards. This complexity can influence how they structure their capital, often leading to the use of more sophisticated financial instruments like currency swaps to hedge against exchange rate fluctuations. The ability to raise capital from international markets also broadens their financing options.

Domestic Companies: A purely domestic company avoids these international complexities. Its capital structure is simpler and less exposed to external, geopolitical risks. While this reduces complexity, it also limits its access to a global pool of investors and creditors.

Techniques and Examples

Capital budgeting and risk management techniques must be tailored to a company's size and scope.

Risk-Adjusted Discount Rate (RADR): While all companies use a discount rate in their capital budgeting, a large, international corporation would use a higher RADR for a project in a politically unstable country than for a similar project domestically. This is because the higher discount rate accounts for the increased risk of that specific project. A small business, in contrast, might only adjust its RADR based on the risk of a new product line within its local market.

Weighted Average Cost of Capital (WACC): The WACC calculation for a multinational corporation is far more complex than for a small, domestic business. A large corporation must factor in the different costs of debt and equity across various currencies and tax jurisdictions. A small business's WACC, in contrast, is typically simpler, reflecting its domestic cost of borrowing and the owner's required return.