Question

Analyze how much of the funding should come from debt, and how much from equity. Support your evaluation. Please provide reference

Answer 1

Appropriate Debt - Equity structure :

The funding of the capital structure of the company should be of Debt and Equity depends on the nature of the industry.

The high degree of debt relative to the issued equity, will not have confidence in repayment of the loan. On the other hand, the ratio of debt/equity ratio at the lower level means that the leverage is not properly utilised for enhencing the wealth of the equity shareholders.

Service industry would be appropriate to have the Debt / Equity ratio of 0.50 because they do not have that much of assets with them whereas the capital intensive industry can very well enjoy the debt / equity ratio of above 2 because the industry have to have a large capital assets for operation.

Being having higher return on capital, the capital intensive companies can have higher Debt/Equity ratio as they can afford to pay higher interest cost.

Generally, a common size company would be safe to have a Debt / Equity ratio of 1. Where an equilent amount of debt is used to appreciate the wealth of the equity shareholders.

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