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1. That cost of finance is less than the Return which implies the rate should not be less than the bank interest + inflation + risk.
2. Economic conditions prevailing – use debt under boom conditions.
3. Present gearing – if high this will lead to:
4. Low credit rating
5. Lowering of the company’s share prices especially to less than Par value – this leads to mass sale of shares – creditors rush to draw their finances and therefore receivership.
6. Long term ventures have to call for independent feasibility studies before funds are committed i.e.
7. Assessment of the return – at least should be greater than minimum return + risk + inflation.
8. Economic life – if uncertain, the return ought to be higher. Such life must allow the company to pay off the loan.
Kavungya answered the question on March 11, 2019 at 12:43