Question

You are the controller of a firm whose CEO believes that debt should always be used to finance long-term expenditures because interest is (at least partially) tax deductible. List and describe other benefits to debt financing. Also, list and describe risks to using debt.

Answer 1

Answer)

Benefits of debt financing:

1)Debt financing doesn't result in dilution of ownership i.e Owners have same control over the even after Debt financing.

2)Debt financing just need fixed amount of timely repayment irrespective of profits of the organization.

3) Accessible to any size of business even at beginning of it's life cycle easily if there is enough security compared to other sources of funds.

Risks of using debt:

1)Even though the business fails,the obligation to repay the debt still remains.

2)Failure in timely repayment may affect your credit rating which may have impact on securing future loans.

3)The Interest rates keep on increasing with the increase in debt finance amount.