Business Finance Chapter 11 we find that firms are always trying to find the optimum mix...

Business Finance

Chapter 11

we find that firms are always trying to find the optimum mix of debt and equity to fund new projects. There are many tools a financial analyst can use to predict the valuation of each source of funds. We also learn that it is good to have a certain amount of debt and its good to use a certain amount of retained earnings to fund new projects. Please discuss why it is not a good idea to use all debt or all equity to fund new initiatives. Be sure to include the justification for your comments.

Expert Solution

Yes it is not a good idea to use all debt or all equity to fund new initiatives. It is better for the company to have a optimal mix of debt and equity. There are various tools to find optimal mix that are trade on equity , wacc and many other . The optimal mix is beneficial for company because if in case company can finance all the funds from the debt then there is a high burden of interest on the company and we know debt are risk free so company has a liability to pay the amount of interest even company is in loss or not earning profit and let us suppose if company can finance all the funds from equity and cost of equity is 15% and cost of debt is 10% then company has to pay dividend at more as cost of equity is high as compared to cost of debt so company needs to pay more in case of equity

That's why if company has a optimal mix then company can have a weighted average cost of capital

And if company earns more profit then company have to pay debtors only up to a limited interest and rest to shareholders and if company face loss then company can take or recovered the loss from shareholders.

For eg company financed 200000$ in which 100000 from equity and 100000 from debt

kd = 10% and ke = 15%

And company earned profit of 30000

The interest to debt holders are 100000*10% = 10000

And rest 20000 to equity

And if company earns loss of 30000 then company need to pay only to debt holders that is 10000

And if in case company finance all the funds from debt holders than company needs to pay 300000*10%= 30000 in case of loss

jeff jeffy answered 2 years ago

home / study / business / finance / finance questions and answers / question 11 the...

home / study / business / finance / finance questions and answers / question 11 the taxing and spending policies of the federal government designed to promote ... Question: QUESTION 11 The taxing and spending policies of the Federal Government designed to promote nati... Edit question QUESTION 11 The taxing and spending policies of the Federal Government designed to promote national ecomomic goals are known as "fiscal policy." True False 3 points QUESTION 12 Most states exempt their own...

Business Finance In Chapter 7 we take up the issue of managing current assets. Discuss one...

Business Finance In Chapter 7 we take up the issue of managing current assets. Discuss one major thing the financial manager can do to assure the highest possible return on investment for each of the following: cash, marketable securities, accounts receivable, and inventory. Be sure to explain your choices.

In chapter 10, we looked at bonds and chapter 11 examined the use of stock financing....

In chapter 10, we looked at bonds and chapter 11 examined the use of stock financing. What are some advantages for a business using either of these methods of financing. Would it be advantageous for a company to use a combination of both?

hi, my course is business finance Why is it important for firms to monitor and...

hi, my course is business finance Why is it important for firms to monitor and control cash flow?

Business Cycle We have learned that a competitive market always experience business cycles in the short...

Business Cycle We have learned that a competitive market always experience business cycles in the short run. The output fluctuate around the upward trend, creating four period: recovery(from trough to trend), expansion(from trend to peak), contraction(from peak to trend) and recession(from trend to trough) . The cycle is usually self enforcing, when we are in the expansion, asset price goes higher and higher, so as the value of the collateral, people become optimistic and inclined to engage in the more...

Chapter 11 - The Role of Chance in Psychology By Stanovich Stanovich explains "when we say...

Chapter 11 - The Role of Chance in Psychology By Stanovich Stanovich explains "when we say that something is due to chance, we do not necessarily mean that it is indeterminate, only that it is currently indeterminable". What is the difference?

In Chapter 10, we learned about the capital budgeting process and how firms measure the value...

In Chapter 10, we learned about the capital budgeting process and how firms measure the value of investment opportunities. In this chapter, we learn about short-term financing measures. When firms are capital budgeting, do they also consider these short-term loans and marketable securities?

We always seem to be focused on using statistics in Business decisions. Please think of some...

We always seem to be focused on using statistics in Business decisions. Please think of some ways you can use statistics in your own decision making. For example, when we go on vacation as a family, we choose between many different types of travel. Using statistical analysis, I am able to come up with different pricing options.

Chapter 11, 12: Money and Inflation III. Define the following costs of high inflation and find...

Chapter 11, 12: Money and Inflation III. Define the following costs of high inflation and find examples. 1. Menu costs 2. Shoeleather costs 3. Confusion and inconvenience 4. Distortions in relative prices and the allocation of resources 5. Tax distortions 6. Arbitrary redistributions of wealth Reference: Brief Principles of Macroeconomics textbook

Excellence in Business Communication (12th Edition) Chapter 11 Can knowing the source of information that you...

Excellence in Business Communication (12th Edition) Chapter 11 Can knowing the source of information that you find online unfairly bias you against the information? Explain your answer.

Question