The amount of debt taken into a company's financial structure is one of the key financial decisions. When too much debt is taken on board, the company is risking technical bankruptcy if the company's cash inflow falls below the minimum level predicted. If too little debt is taken on, the company's cost of capital becomes unduly high compared with its competitors since it has failed to take advantage of the tax benefit from debt financing. The company's investment programme is impaired and the value of its equity falls on the stock exchange. This scenario might be described as the “conventional wisdom” of debt financing.
CitationDownload as .RIS
MCB UP Ltd
Copyright © 1976, MCB UP Limited