The Capital Structure Decision And The Cost Of Capital-finmod4case

Advantages and Disadvantages of debt financingDebt financing basically means undertaking debt obligations from an understructure which may in most cases be a financial institution like bounds or developmental financing institutions . Borrowing from a bank or other financial institution has some(prenominal) advantages including tax deduction benefits , not parting with avouchership of the ph matchlessr and earning higher return on assets and equity . On the minus side , debt obligations can result in disadvantages as come up including positive and negative covenants imposed on companies in to conduct a give . Other disadvantages include having enough specie flows to pay back debt and interest obligations , having a markup rate appoint to the loan indicative of a regular interest cosmos accrued and payment of the same to the financial institution from which the loan has been taken , and having collateral to secure the debt obligations to be taken . In such cases , a beau monde may want loans to be taken from the directors in to eliminate the interest rate federal agent assigned in case of loan taken from a bank . In the case of equity financing , the company will not have to keep security or collateral against the loan taken , nor would it have to necessarily support debt payments (Debt vs . Equity Financing Consider a firm that inescapably 8 ,000 in assets . It can be financed in one of two waysIt could be 100 equity , or 50 equity and 50 debt . If it sells stocks they will sell for 20 per section . They could also borrow at 10 .

If they invest , the state of matter of nature will determine the ROAAll Equity Structure tally of shares four hundredDebt 0Interest payments 0State of temperament respite Normal Boom BreakevenROA 5 15 25 10EBIT 400 1 , two hundred 2 ,000 800ROE 5 15 25 10EPS 1 .00 3 .00 5 .00 2 .00Leveraged Capital Structure Number of Shares 200Interest payments 400State of Nature Recession Normal Boom BEROA 5 15 25 10EBIT 400 1 ,200 2 ,000 800Interest Payments (400 (400 (400 (400Net Earnings 0 800 1 ,600 400ROE 0 20 40 10EPS 0 4 .00 8 .00 2 .00Now consider an investor with two plans . She has 2 ,000 of her own moneyPlan One : She uses her 2 ,000 and buys 100 shares in the leveraged firm . At 20 per share that will give her 100 shares . What would be her returnState of Nature Recession Normal BoomEPS 0 .00 4 .00 8 .00Earnings from Stocks 0 .00 400 800Plan Two : She borrows 2 ,000 for a bank at 10 , and she combines that with her own 2 ,000 for a shares in the Since she has 4 ,000 she will buy 200 shares . What are her earningsState of Nature Recession Normal BoomEPS 1 .00 3 .00 5 .00Earnings from Stocks 200 600 1 ,000Interest owed bank...If you want to get a full essay, graze it on our website: Ordercustompaper.com

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