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The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure?
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The more highly geared a company, the greater will be the amount of fi...
Factors to Consider in Determining the Amount of Debt in Capital Structure
1. Cost of Debt:
The first major factor to consider is the cost of debt. Management needs to evaluate the interest rate on debt and determine whether it is feasible to take on additional debt based on the company's ability to make interest payments.
2. Risk Tolerance:
Management must consider the company's risk tolerance when deciding on the amount of debt to be used in the capital structure. Highly geared companies have a higher financial risk, which may not be suitable for all businesses.
3. Financial Flexibility:
Having an optimal amount of debt allows a company to have financial flexibility. It can help fund growth opportunities, provide liquidity during tough times, and enhance shareholder value.
4. Cash Flow Stability:
Companies with stable cash flows can afford to take on more debt since they have a consistent stream of income to cover interest payments. Unstable cash flows may lead to difficulties in meeting debt obligations.
5. Industry Norms:
Management should also consider industry norms when deciding on the amount of debt. Some industries are naturally more leveraged than others, and it is essential to stay competitive while maintaining financial stability.
6. Growth Opportunities:
Lastly, management should assess the company's growth opportunities. Debt can be used to finance expansion and investments, but too much debt can hinder growth if interest payments become burdensome.
In conclusion, management must carefully evaluate these factors when determining the amount of debt to be used in the capital structure. Balancing financial risk, cost of debt, and growth opportunities is crucial for maintaining a healthy capital structure and maximizing shareholder value.
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The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure?
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The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure?.
The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for The more highly geared a company, the greater will be the amount of financial risk borne by the shareholders. Discuss Briefly outline the major factor to be considered by management when deciding on the amount of debt to be used in a capital structure?.
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