What the advantages of using debt financing

      

What the advantages of using debt financing.

  

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Lydia
Advantages of using Debt Financing.

1. Most debt financing is short-term and as such it will not burden the company‘s cost of financing for long: cost is short-lived.

2. Interest on debt is a tax-allowable expense and thus the effective/real cost of debt will be equal to interest less tax on interest: interest is less by the much of tax on it. ( refer to cost of finance)

3. the principal is later reduced in real monetary values by much of inflation on it; the company pays less on long- term loans by virtue of inflation reducing the real monetary value of the principal and interest.

4. The use of debt finance does not necessarily entail dilution of control to existing shareholders are these shareholders may only lose the control if the company has used 67% of debt finance in its financing: in its total capital employed.

5. it is usually invested in viable ventures whose return is higher than its cost, thus it is used with a good investment policy

6. This finance does not call for a lot of formalities in its use in as much as it does not involve a lot of floatation costs.

lydiajane74 answered the question on May 9, 2018 at 19:37


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