How Much Should A Firm Borrow?

Abstract

Firms should borrow a lot to finance their investment schedules, because interest payable on borrowings is tax deductible. However, firms should not borrow beyond the point where bankruptcy becomes a distinct possibility. When a firm's investment schedule collapses by failing to generate adequate cash to make compulsory interest payments, shareholders may be forced to suffer the costs and delays of liquidation. To ensure the survival of the firm, corporate managers should have a strategy for financial emergencies.

Citation

Dobbins, R. and Pike, R. (1982), "How Much Should A Firm Borrow?", Managerial Finance, Vol. 8 No. 1, pp. 17-22. https://doi.org/10.1108/eb013498