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Alexus [3.1K]
3 years ago
12

When should a company consider issuing debt instead of equity?

Business
2 answers:
AURORKA [14]3 years ago
7 0

Answer:

There could be many reasons, but probably the company reached its debt ceiling and is not able to borrow anymore (at acceptable conditions), due to low net cash flow relative to debt service, or low available collateral, or both.

Larger expansions or risky undertakings would also be more likely financed by equity - the expansion might require taking on more debt than the company is currently able to service, and the creditors are not sure if it will also bring sufficient additional EBITDA to service large debt. Similar thing with risky business proposals - it is more logical to finance them through equity, where investors share the hard-to-predict benefits as well as potential losses. If they were to be financed by debt, the loan should in theory carry very high interest to make up for the risk profile of the endeavor. Better to make it an equity investment.

Also, issuing equity improves your balance sheet and enables you to take on more debt. Having more equity could also mean cheaper debt (better interest rates). Debt is considered “senior” to equity, in theory losses should hit investors first and creditors later, so having a larger equity cushion means lower credit risk.

If the company suffered some hard times, they are already starved for cash and on top of that creditors would likely want to reduce their exposure - a perfect storm that could put the company out of business due to lack of liquidity, even when the business model is good in the long term (but who has a crystal ball, eh?). Raising more equity may be their only option.

Aloiza [94]3 years ago
5 0

Answer:

Many fast-growing companies would prefer to use debt to support their growth, rather than equity, because it is, arguably, a less expensive form of financing (i.e., the rate of growth of the business's equity value is greater than the debt's borrowing cost).

Explanation:

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American Inc. had gross sales of $925,000. Cost of goods sold and selling expenses were $490,00 and $220, 000 respectively Ameri
drek231 [11]

Answer:

a. Particulars                                Amount

Gross sales                                  $925,000

Less: COGS                                 <u>$490,000</u>

EBITDA                                        $435,000

Less: Depreciation                      <u>$120,000</u>

EBIT                                              $315,000

Less: Interest on notes payable <u>$8,800   </u>  (220000*4%)

EBT                                               $306,200

Less: Tax (35%*306200)             <u>$107,170</u>

Net Income                                   <u>$199,030</u>

<u />

b. Operating cash flow = Net income + Depreciation

Operating cash flow = $199,030 + $120,000

Operating cash flow = $319,030

6 0
3 years ago
Wrong Meds, Again! “It was horrible,” said the distraught client. “No matter how many times I provided the information, no one l
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Answer:

Explanation:

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4 years ago
Greiner, Inc., a calendar year S Corporation, holds no AEP. During the year, Chad, an individual Greiner shareholder, receives a
Likurg_2 [28]

Answer:

The long term capital gain= $30000-$25000

The long term capital gain= $5000

The basis in stock will be zero after the distribution.

Explanation:

Step 1 of 3

Tax treatment of amount distributed to shareholders:

The amount received as distribution to a shareholder under S Corporation is equal to the cash and fair market value of property distributed. The distribution is considered as tax-free to the limit that it does not exceed shareholder’s basis in the company’s stock. Any amount received in excess of basis will be treated as capital gain.

Step 2 of 3

However, taxation depends whether S Corporation has ever been a C Company or it posses’ accumulated earnings and profits. If it was never a C Corporation or doesn’t holds AEP then distribution equals to basis of share in S Corporation is a tax free gain for shareholder. Gain over and above basis is taxed as capital gains.

Step 3 of 3

In the given problem, C is a shareholder in S Corporation. He receives $30,000 as cash distribution. His basis in stock is $25,000. The distribution up to basis of stock is tax free distribution and above that is charged to capital gains. It is as follows-

Thus, capital gain of  is taxable in hands of C. His basis in S Corporation will reduced to zero as entire distribution is over and above basis of his stock.

3 0
3 years ago
Jackson Implements, Inc. uses straight-line depreciation for an item of equipment that cost $135,000, had a salvage value of $15
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Answer:

the depreciation that should be charged over the useful life each year is $20,000

Explanation:

The computation of the depreciation expense using the straight line method is shown below:

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Explanation:

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