lright, this week we will discuss the topic of debt. As I stated in this week\'s
ID: 428114 • Letter: L
Question
lright, this week we will discuss the topic of debt. As I stated in this week's announcement, "it takes money to make money." In other words, debt makes it possible for organizations to take advantage of market opportunities that would otherwise not be available if the firm was 100% equity financed. Having said that, engage your peers in a detailed, back-and-forth discussion that explores the merits of debt. In your answer, please emphasize what happens to risk, return, and how we can "measure" whether the amount that a firm is borrowing is appropriate
Explanation / Answer
In financial management , We know that debt is the cheapest source of finance . Genearlly , any business makes its capital structure through debt and equity mix. It can be said as debt means money to make money. We can even analyze it as a chance to invest and get return in those sectors where we can not go ahead with our equity fund. We can measure the amount of a firm is borrowing through cost of capital methods. It includes both cost of debt as well as cost of equity.
cost of equity fund can be caluclated through capital asset pricing model ,(CAPM) = risk-free rate + (company’s beta x risk premium).In this , The firm’s overall cost of capital is based on the weighted average of these costs.
Debt financing is tax efficient than equity finance. So, a firm should go for some debt as well rather than investing through equity only.
References : Cost of Capital https://www.investopedia.com/terms/c/costofcapital.asp#ixzz5K9b27nHM
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