The Pink Balance Sheet: An Easy Way to Teach Capital Structure Basics

Abstract

Students of corporate finance must learn the basics of capital structure theory. However, most textbook discussions are confusing and include too many equations. We present a simple model of tax-related capital structure basics that incorporates only three components: a market-value balance sheet, colors that represent risk, and one equation. Students mastering the pink balance sheet should be able to remember easily the various implications of basic capital structure models, including beta relationships such as the Hamada equation.

Keywords: Capital Structure, Beta Levering, Hamada Equation

JEL Classification: G32