Referencing textbook readings, lecture material, and current business resources

Question

Referencing textbook readings, lecture material, and current business resources briefly explain pros and cons of using debt financing.

Also, discuss types of companies that should be carrying relatively lower levels of debt (list 3-4 descriptive aspects of these firms: their size, level of volatility in sales and free cash flow, predictability of this volatility, age of the firm etc. - any features you think are important). Provide an example of a firm (or entire sector)) which should use more debt and give an example of a firm (or entire sector) for which using less debt financing would be rational.

Explanation / Answer

Debt financing is described as borrowing money or raises capital to manage and run the company’s expenses. Like the working capital, etc. They would sell bonds, notes or bonds to an individual or institutional investors. They can also go in for selling shares and stocks in a public offering, which is called equity debt. The individuals and investors become creditors and will receive a promise to repay the principal and the capital.

The companies which should carry lower levels of debts include the following:

Companies which are capital intensive like automotive and steel manufacturers should go for a larger debt financing as these require huge infrastructure and can get finance at a lower rate of interest against their assets without liquidating their equity and shareholding. The IT companies and sector should go for low debt financing.

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