Mixed Capital System
As one of the main forms of capital structure, the mixed capital system attracts investment from both internal and external sources. It combines the features of the equity system (external capital) and the debt system (internal capital). The mixed capital system strategy is widely used in corporate finance and global capital markets, providing numerous benefits.
In simple terms, the mixed capital system combines both equity and debt funds, allowing companies to raise capital from both external and internal sources. Equity funds come from shareholding, whereas debt funds are provided for by bondholders. Both types of funds supply companies with additional capital, but their sources differ. Equity funds are regularly deemed to be more effective and potentially more lucrative, as companies do not have to pay interest on them, however, debt is easier to raise quickly, meaning companies are often forced to make use of debt funds in situations where a large amount of capital must be acquired quickly.
The main advantage of the mixed capital system is its efficiency in providing companies the ability to maximize their capital structure. By employing this system, companies are able to combine the benefits of both equity funds and debt funds. This allows for greater flexibility in the overall capital structure of the company, allowing them to respond quickly to changes in the business environment. It also allows companies to take advantage of the diversity of debt and equity funds and to create an optimized capital structure.
Moreover, the mixed capital system also has certain benefits to the shareholders. The existence of debt means that shareholders can benefit from the security offered by this type of fund, as debt instruments are less volatile than equity. It also allows for greater investment opportunities for shareholders, due to the potential for increased returns associated with lower risk.
Apart from these advantages, the mixed capital system also has certain drawbacks. One of the primary disadvantages of this system is the complexity of managing the capital structure. The presence of external and internal sources of funds means that companies must have well-managed and documented procedures in place to ensure that all funds are adequately monitored and managed. Moreover, the complexity of the capital structure also increases the cost of running the business, as companies must allocate more resources to administration and risk management.
Lastly, the integration of both the equity and the debt funds may lead to a conflict in corporate strategies. The equity system works on the principle of providing shareholders with high returns, while the debt system focuses on providing investors with low-risk and secure investments. A conflict between these two systems may arise, resulting in a complex and inefficient capital structure.
In conclusion, the mixed capital system is an effective form of capital structure, as it allows companies to access both external and internal sources of funds. Although it may lead to additional complexity and cost, the flexible nature of the system allows for increased optimization and potential for increased returns. Furthermore, it gives companies the opportunity to take advantage of the contradictory benefits that can be obtained from debt and equity funds. Therefore, this system remains a viable option in many corporate finance and global capital markets.
