Question

There are many times that debt can be advantageous for a company. Provide an example of a company that took on too much debt and what eventually happened. Attach an article and introduce us to why they took on the debt and what happened.

Answer 1

Debt is a loan that company takes from banks, venture capital, private equity etc. for raising capital. Debt is advantageous for company as it is easily available and interest on loan is deductible expenditure under income tax.

Disadvantage of debt- There are times when debt is nightmare for companies. It comes up with liability, it increases company's obligation. Heavy debt is not good for companies as if it does not repay its previous debt, it does not get new loan from creditors. There are many companies with heavy debt, their business survive due to debt, they are not able to pay dividends to shareholders because most of the profit goes in paying interest on loan. Interest is a burden that decreases net profit for companies.

Examples:

Kinder Morgan- Kinder Morgan and its Canadian partner spent CAD$ 610 Million on pipeline's construction. Debt of this company is too high. It has net debt of $35 Billion debt.

Campbell's soup- It had $8.1 Billion long term obligations in 2018 that was four times higher than the debt held in 2017.

• Kroger