The capital structure decision and the cost of capital

Debt Financing

Feb . 22 , 2009

Introduction

This deals with the issues of financing mix . It explores the advantages and disadvantages of debt-equity financing mix in the success of a firm . The early portion of the deals with the advantages and disadvantages of debt financing . The next section deals with the effect of debt financing on the return on shareholders equities . It also includes discussion of optimal capital structure of a firm . The final portion of this highlights three chosen companies : The Kroger Company , Intercontinental Hotels Group , and Whirlpool . I will

try to evaluate the financing mix of the company based on the discussions of debt financing and optimal capital structure

Advantages and Disadvantages of Debt Financing

In a book by Karl Seidman titled , Economic Development Finance debt financing in general is the opposite of equity financing (Seidman 2005 ,

.26

Debt financing has the following advantages . First , it offers no strength of ownership . With debt , lenders have higher priority on their invested bonds than shareholders . Second , debts are now available at lesser rates from many lenders . Finally , it offers greater availability (Seidman ,

.32 , mainly streaming from the increasing number of lending firms around the world . When firms decide to incur debt to finance their business , finding lenders is not too hard . The obligatory mode of payment in terms of regular principal and interest , plus providing collaterals to debts increases the confidence of the lender to approve and issue debts to borrowing firms . Plus , interest rates come...