Corporate debt can actually be beneficial to a firm in some cases, debt plays an important role in allocation of resources for a company.
Corporate debt can actually be beneficial to a firm in some cases, debt plays an important role in allocation of resources for a company. First, interest payments tend to be tax deductible, which helps lessen the financial burden on a company. Second, debt is payed back at a later date and due to the nature of inflation, debt is normally paid back with cheaper money, an example being, a bond for $40,000 today is worth more than the $40,000 will be worth in 10 years. Other benefits include; debt being a fixed-natured financial obligation and that debt may lessen the cost of capital for the company (Block, et. al., 2019). One drawback to debt is that their is a financial obligation for the firm that they must meet regardless of the current economic and financial state of the firm. Another being that debt may drop stock values for the company (Block, et. al., 2019). Assessing debt brings us back to prior sections where we can discuss debt to asset ratios and debt to equity ratio. These ratios give a financial manager insight on how a company is doing in regards to its debt. High ratios show a higher degree of debt utilization as compared to asset and equity. With this knowledge a financial manager can decide whether to continue to utilize debt within the firm\’s capital or to defer debt at the time and look for a different form of funding (Block, et. al., 2019). These ratios provide an insight to whether debt should be increased or decreased, alongside interest rates and total of scheduled payments. One of the drawbacks of debt is that a firm does have a financial obligation each cycle, whether it be monthly, quarterly, annually, et cetera, if these cyclical payments are higher than what is reasonable to the firm, debt should be decreased; the vice versa is also present.
Block, S. B., Hirt, G. A., & Danielson, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/
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