Question

1. Why is a financial structure of a mix of equity and debt finance being preferred in financing businesses?
2. Explain the difference between debt and equity and explain how the bonds market operates.
3. Explain why people demand for money and how demand for money would have been influenced by Covid-19 epidemic?

Answer 1

1. Financial structure of a mix of debt finance and equity finance is generally preferred because it will help in risk maintenance and it will also help in maximization of the overall return of the company and it will also help in diversification of the capital structure in different types of Financing method which will hedge against each other.

generally debt financing is associated with interest rate tax shield which is a tax deductible in nature. The benefits related to debt financing should be traded off with cost of financial distress in order to gain from higher rate of return than cost of debt.

2. Differences between debt and equity is that debt capital is providing the the interest regular payments whereas equity capital dividend are not mandatory in nature

debt capital does not provided with the ownership right whereas equity capital will be providing with the ownership rights.

debt capital will not be providing with the right to vote in the companies management where as equity capital is providing up with the right to vote in the companies management.

3.people will always demand for money because money will always be acting as a mean to store of value and measure of exchange and it will help them in order to increase their savings and lifestyle and increase the disposable income as well so money flow is important in the economy in order to increase the overall Gross Domestic product and covid-19 has impacted adversely as monetary policy has been designing in such a way that they are trying to stimulate the demand in order to raise the level of money flow into the economy which has been completely evaporated