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Finance & Accounting
Pages 5 (1255 words)
Running Head: Finance Finance [Institute’s Name] [Student’s Name] Does the mixture of debt and equity in a firm’s financial structure matter? Why? A specific mix of capital structure incorporating debt and equity is essential to undergo various businesses and finance operation.
The debt financing includes bonds, leasing, borrowings from bank and mortgages and is universally seen as the easiest and cheapest way of financing activities. It also carries a tax-deductible benefit that is an attractive source in investing activities as interest payments will be expensed out (Narayanan, 2009). It also carried a risk of debt payments and leverage which could result in decrease in revenues. The probability of risk is also dependent on the industry it operates and the possibility of the firm to cover its fixed cost over profits. In the event of recession and inflation, the debt can have an adverse effect on the business activities as fixed cost directly affects the decline in sales that can also results in lower profitability (Cox, 2011). The equity finance is an expensive and exclusive method for raising capital in the business and it comprises of ordinary and preference shareholdings, bonds and floating market shares. It also includes a listing cost and legal paper work, potential shareholders and raises wider opportunity for pool of finance (Slee, 2011). The difference in usage of appropriate financial capital structure is the selection of Leverage the business can be adhered to. It signifies the impact of debt in the company’s capital structure e.g. long-term bonds for 5 to 8 years and their impact on company’s profitability and earning stream (Khan et al., 2005). ...
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