Is there a certain amount of debt that is too much debt when you want to...

Is there a certain amount of debt that is too much debt when you want to extend your credit

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Expert Solution

Yes, there is a certain amount of debt beyond which one organisation should not be accepting the credit because it would be leading to risk related to insolvency and liquidity of the company, because it would be leading to the bankruptcy related risk and existence related risk for the company.

Company should always be trying to infuse debt into certain level till which it can easily be bear all the cost related to debt and it can maximize its overall rate of return so it will be helpful for the company in order to maximize the organisational values by using their capital and extending the credit, but beyond level of optimisation of use of debt capital in the overall capital structure, it is not possible because it would be leading to excessive load on the company on the part of interest payment and when the company will be facing up with the economic adversity and adverse economic cycle, company can expose itself to a lot of credit related risk and it can expose itself to the bankruptcy and financial distress cost, so there will be a high degree of concern regarding existence of the company & the company should be trying to always predetermine the existing debt level and it should fix a debt level beyond which it should not be borrowing because it can lead to solvency risk and financial distress cost.

It can be summarised that the company should always keep a check on the overall debt capital which is to be used in the business so it will help them in order to maximize its organisation value using optimal capital structure.

jeff jeffy answered 1 year ago

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