Capital structure substitution theory

Capital structure substitution theory is a fancy way of talking about how companies decide to borrow money. It is like when your mom and dad decide whether to use their credit card or their savings to buy something.

Companies also have to make this decision, but they have to think about a lot more things before they can borrow money. For example, they have to think about how much money they need, how much they are already borrowing, and how much money they think they can make in the future.

The capital structure is basically the mix of all the different types of money a company uses to finance (or pay for) things. These types can include borrowing money by issuing (or selling) stocks, bonds, or other types of loans.

The capital structure substitution theory says that when a company wants to borrow money, they will try to find the best way to do it. They think about what type of borrowing will give them the best balance between how much they pay in interest and how much risk they have. It's like choosing between different flavors of ice cream, they have to pick the one that will be the best for them.

Sometimes companies will substitute (or replace) one type of borrowing with another, to try and get the balance between cost and risk just right. They may switch from one type of loan to another, or issue more stocks instead of borrowing more money.

In summary, the capital structure substitution theory is like trying to find the best way to borrow money for a company. They need to consider how much money they need, how much they are borrowing already, and how much they can make in the future. They have to choose between different types of borrowing, like stocks or loans, to get the best balance between cost and risk. Sometimes they might switch from one type to another, like changing ice cream flavors.