Question

Assume that the president of Elkhead Brewery made the following statement in the Annual Report to Shareholders:

"The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during Prohibition and the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk. As such, all future growth will be financed either by stock sales to the public or by internally generated funds."

As a public shareholder of this company, how would you respond to this policy?

Answer 1

Majority use of debt can be risky. because if the company even bear the loss interest on debts is pay is compliance. bebt are the fixed charge fund. other side equity or common stock are not fixed charge fund. Company paid divided only in the case of profit. either in the near future company had great chance for the extend of business company can retain all profit for future benefit.

Other side debt can help in the wealth maximum of the equity holder. company use the proper ratio of bebt according to the earning of the company so the payment of interest paid timely and wealth maxieof the equity

The main canclusion that if company had no fixed income for the payment of interest company wouldn't use of debts only use of equity financia. either the company had fixed income for the payment of interest of debt. company should be use of some propertion of debts. so take the benefit of trading on equity