1. Core concepts: the three questions
Cost of capital·The price of money: debt costs interest, equity costs the return shareholders demand. Returns above this line create value; below it, value is destroyed.
Capital structure·The mix of debt and equity. Debt is cheaper and tax-deductible but must be repaid; equity is expensive but flexible. There is no universal optimum, only a fit with cash flows.
Many companies report accounting profit yet earn less than their cost of capital. They look busy while quietly destroying value. The cost of capital is the one yardstick every decision should share.
2. Four sources of money
Equity
＋ No repayment pressure
－ Dilutes control, most expensive capital
适合 Growth firms with volatile cash flow
Debt
＋ Cheaper and tax-deductible
－ Fixed obligations can break a company
适合 Stable cash flow with collateral
Convertible bonds
＋ Low coupon, upside participation
－ Complex terms, future dilution
适合 Listed firms with growth optionality
Retained earnings
＋ Fastest and most autonomous
－ Limited scale, dividend opportunity cost
适合 Mature cash-generative firms
The core principle is matching: long money for long projects, short money never for long-lived assets. Maturity mismatch is the number one cause of cash flow crises.
3. Four questions before raising money
Why raise?
Funding growth and funding survival are different decisions with different standards.
Which instrument?
Match maturity and risk to the use of funds.
When to raise?
Raise in good times: cheaper, looser terms, more negotiating power.
What is the true cost?
Count interest, dilution, control, disclosure and commitments together.
4. Capital markets in the AI era
Direct listings and SPACs widened the paths to public markets, while disclosure technology narrowed the room for financial engineering. Transparency itself becomes a financing capability.
- RegTech detects financial manipulation more precisely.
- Investor relations becomes continuous rather than episodic.
- New instruments offer more maturity and cost combinations.