Question

Why is a financial structure of a mix of equity and debt finance being preferred in financing businesses?

Answer 1

Financial structure of both debt capital and equity capital is always preferred into the business because it will provide the business with an optimum flexibility and it will also provide the business with the help of getting an advantage through tax deduction available on the debt capital.

Exposure to just one form of capital will always be disastrous for any kind of company in adverse economic scenario when the circumstances are against that specific form of capital. A company should be having exposure in both form of capital in order to gain from advantages and in order to hedge itself from disadvantages so it can maximize rate of return and minimise it's over-all Risk.

there is a benefit which is associated with the overall debt capital as debt capital which is to be paid with interest are always tax deductible in nature and those benefits are to be traded off with the cost of financial distress which are also embedded with debt capital.

A Company should always be having an appropriate mix in order to maximize his overall rate of return and minimise it's overall risk to help itself survive and sustain in the long run.