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Essay sample - Principles of finance.
Finance & Accounting
Pages 6 (1506 words)
“In a world with corporate taxes, Modigliani and Miller’s view is that a company should issue as much debt as possible. Why is this advice not followed by companies?”A debt is often an obligation owed by a debtor to a creditor, who is usually the second party…
In this case, the debtor is the companies in question. In most cases, this is termed as assets granted, particularly by the creditor to the debtor. The debtor agrees to repay the debt with an interest. Some companies use debt as part of their strategy in corporate finance. Before the debt is issued, both parties have to agree on the standard of deferred payment. In most cases, this repayment is in the mode of currency (Blum 2006). However, this repayment can be in the form of goods and services. Payment can be paid in installments or in the whole amount at the end of a loan agreement. A company offers different kinds of debts to customers to finance its operations. There are secured and unsecured debts, depending on whether the creditors have recourse to the assets of the borrower or not. In addition, there are private or public loans depending on the parties involved. One of the main reason why companies tend not to issue as much debt as possible is the fear of becoming bankrupt. If a company issues more debt than its stipulated capital, then the possibility of bankruptcy is usually high. This is especially in unsecured debts, and the borrower happens to forfeit payment. If this happens with a considerable number of borrowers, then the company can be at an extreme risk (DePamphilis 2011). Therefore, these companies offer debts amounting to the given budget. The financial advisors of the company advise the top managers on the considerable amount of debts to issue that would not alter the normal functioning of the company in any way. ...
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