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Current time:0:00Total duration:4:01

Video transcript

in the last video I talked about how both Ben's shoes and Jason's shoes are fundamentally the same business but they have different capital structures and the way we saw that is that they they're everything their revenue gross profit all the way down to their operating profit was exactly the same they're generating the same economics from the operating part of their differ 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're the same they both have $20,000 in cash and I've drawn it over here this is Ben's assets $20,000 in cash $20,000 in cash they both have $100,000 in inventory and I've made 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 $20,000 we do that in that same color and they both have $20,000 of equipment $20,000 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're also renting in very similar locations that's what they 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 liabilities 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 may be the people they're buying shoes from they're able to delay paying their those those super just is 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 $5,000 in in accounts payables let me do that I'll do that in pink so they both have $5,000 I'll try to do it proportional to the size so that right over there that is the accounts payable the $5,000 they both have that on the liability side now where they really diverge so this is the same amount $5,000 it should be about 1/4 of the side it's not exact the way I've drawn it but where they really diverge is that Jason Jason over here let me do this in an appropriate color Jason over here has $100,000 in debt and Ben has no debt so in his liabilities he also has $100,000 he also has $100,000 in debt so this is the debt right over here $100,000 and then doesn't have it so the way the way you can think about capital structures they have the same assets capital structure tells you how did they pay for that asset that they take it with debt are they deferring payments to the sum of their vendors or do they have equity and we could see whatever is left over remember owner's equity is assets minus liabilities so what we have left over here is the owner's equity so they both had $135,000 in assets you subtract out the hundred and five thousand dollars of liabilities for Jason he has 35 K of equity $35,000 of owner's equity on Ben's side he has much more so he kind of paid more of this or more of the capital structures equity here more of it is debt but if you have 135 or $140,000 in assets you have $5,000 liability here he has 135 thousand 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 between lot between debt and equity we're also talking about how 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 110 thousand of the just the equity piece so you split that into 10,000 or you could split this right here into 10,000