In the last video I talk about how both Ben's Shoes and Jason' shoes are fundamentally the same business
but they have different capital structures.
And the way we saw that is that, their everything, their revenue, gross profit
all the way down to their operating profit was exactly the same.
They are generating the same economics from the operating part of their business.
But because they have different capital structures
what happens below that line was a little different.
In particular, you saw interest expense on Jason's business and not on Ben's income statement.
So let's look at what that means.
So if you look at both of these guys' assets
so this down here, this is kind of their balance sheet.
You see that they are the same
they both have 20 thousand dollars in cash, and I've drawn it over here
this is Ben's assets, 20 thousand dollars in cash, 20 thousand dollars in cash.
They both have one hundred thousand dollars in inventory
and I've made the height proportional to how many dollars we're talking about
so they both have a larger amount of inventory, and then they both have 20 thousand dollars
let me do that in that same color
and they both have 20 thousand dollars of equipment
so their assets are the same
the things that are actually generating the revenue
and the profit are the exact same thing
we're assuming that they are also renting in very similar locations
that's what would have to happen for them to have such similar economics.
Now what's different about them is what happens on the other side of the balance sheet
and this is what I meant by them having different capital structures
so let me draw the liability's side for both of these characters
so let's do liabilities
liabilities there
and liabilities over here
now, they both have the same amount of accounts payables
maybe the people they are buying shoes from are able to delay paying those shoes just a little bit
so by a few months, or a few weeks, or whatever
so they owe those vendors some money
so they both have 5 thousand dollars in accounts payables
let me do that in pink
So they both have 5 thousand dollars.
I will try to do proportional to the size
so that right over there, that is the accounts payable
the five thousand dollars.
they both have that on the liability size
now where they really diverge
so this is the same amount
5 thousand dollars
it should be about 1/4 of the size its not exactly how I've drawn it
but where they really diverge is that Jason
Jason over here let me do this in an appropriate colour
Jason over here has 100,000 dollars in debt
and Ben has no debt
so in his liabilities he also has 100,000 dollars in debt
this is the debt right over here, 100,000 dollars
and Ben doesn't have it so the way you can think about capital structures
they have the same assets, capital structures tells you
how did they pay for their assets
did they take it with debt are they deferring payments to some of their vendors
or do they have equity
and you can see whatever is left over
remember owners equity is assets minus liabilities
so what we have left over here is the owners equity
so they both have 135,000 dollars in assets, you subtract 105,000 dollars in liabilities for Jason
he has 35,000 dollars in owners equity
On Ben's side he has much more
so he kind of pays more of this or more of the capital structure
equity here, more of it is debt
140,000 dollars in assets you have 5000 dollar liability
here he has 135,000 dollars in equity
so when we talk about capital structure we're saying how are we funding the assets
and not only do we talk about the composition between debt and equity
we also talking about the equity is composed
and we can see in both of these their equity is split into 10,000 shares
so each of those shares would be 1/10,000 of just the equity piece
so you can split that into 10,000 or you can split this right here into 10,000