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?

with more details

Answer 1

1. Financial structure of debt capital and equity capital is preferred in the the overall capital structure because it will be helpful for the overall business in gaining through minimization of risk and maximization of the rate of return.

Debt capital generally have a cost of financial distress and a benefit which is interest rate tax shield so the both should be traded off and an optimal mix of debt capital and equity capital is to be decided which will help the company in maximization of its value

2. Equity capital will be providing up with the ownership rights where as debt capital will be providing up with creditors right and they are bound to get interest.

payment to debt capital is fixed in nature whereas payment to equity capital is not fixed in nature.

equity capital will provide up with the voting rights whereas debt capital will not provide up with the voting rights

Equity capital will not be having any kind of claim on the Assets of the company and have the residual claim where as these debt holders will be having the secured and the priority claim than the equity shareholders.

3. Demand for the money is one of the important part of the overall economy because money is the measure of various assets in the economy and it is also the store of value so an increase in the money supply will be helpful in overall increase in the gross domestic product of the country.

The Federal Reserve will be keeping a check on the money flow with respect to to formation of different kind of monetary policies.

Due to covid-19, the money flow in the economy has completely decreased and monetary policy has been in eased in order to increase the money supply in the economy