Capital Structure Decision

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However the shareholders , who are the owners of that business , and the managers , who run the day-to-day operations of that business , are interested in maximizing the wealth of the business organization in the long term This long-term objective on the part of the shareholders and the managers of the business motivate them to invest in risky projects which have potentially higher returns and thus give the firm greater profit potential in the long term

Often lenders will demand a very high credit rating and evidence of rock solid future business performance before they sign off on any loans Debt financing has its share of advantages primary among which is the opportunity that a firm gets to pay lower taxes as a result of debt financing

Paper Topic: Capital Structure Decision Advantages and disadvantages of debt financing The financing that a business organization needs to conduct its business operations comes from two sources

All this is apart from the fact that the inability to pay off loans in this case will have far reaching repercussions in the form of a damaged credit rating for the firm and this damaged rating will hurt the firm ‘s ability to raise further debt financing in the future

One is equity and the other is debt Equity financing comes from the owners of the business

The parties which are financing the business organization by means of debt are interested in the operations of that business only to the extent that they are going to get their money back in full with interest at the end of the repayment period

One of the problems of debt financing is that the debtor has to make regular interest payments

On the other hand , debt financing comes from parties which have no ownership interests in the operations of that business organization

In the case of equity financing , the management has to make regular payments in the form of dividends to the stockholders

Because the debt financiers are not the owners of the business , a conflict of interest arises

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