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Video transcript

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