Question

What are some examples of good debt vs. bad debt? Please, include an explanation.

Answer 1

Good debt vs bad debt will be dependent upon the ability of the company to maximize upon its debt capital and if the company have a higher rate of return on its capital than cost of capital, then it will mean that the debt is utilised efficiently by the company and it is used for maximizing the rate of return and growth of the company and it is helping in company's fulfillment of its objectives.

Bad debt is the scenario when the company is not able to make up with its cost of debt by rate of return on capital because it is a stuck in debt overhang and it is leading to financial distress caused so company should be trying to always have a better good date in order to capitalise upon its benefits.

Debt capital in the books of Apple is an example of good debt because the overall debt ratio is very lower and it is helping to have a advantage because it can borrow at a lower cost and it can also dispose at a lower price by assuming higher benefits where there's another debt Laden company such as JCPenney which was not able to cope up with the level of debt because they did not generate enough income and hence they can be categorised under bad debt.