Question

The firm's self-supporting growth rate is influenced by the firm's capital intensity ratio. The more assets the firm requires to achieve a certain sales level, the lower its sustainable growth rate will be. Many experts argue that it is better for an organization to grow organically or by putting the money back into the business and not taking on debt. Consider your own organization that you currently work for or have worked for in the past. What is their approach to growing the business? How would you advise your company based on what you have learned this week in terms of self-supporting growth?

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Answer 1

Debt financing is is good for a business for expansion because debt financing has interest cost which is tax deductible in nature and which is helpful in management of overall structure of capital which can propel growth.

A company should be trying to balance it's capital structure and trying to use the debt when the overall cost of that is lower than the return on the capital of the company and the differential between them is leading to the growth.

where as a company should not be focusing on use of the debt where it is not generating enough rate of return to meet the cost of debt so the debt financing to be used for extension in above listed cases and if the company is not efficiently generating enough rate of return, then it should be using more equity and retainined earningg to finances project