Answer to Question #268863 in Management for ann

Question

What do you think is the implications of a company expansion heavily financed

by debt or loan?

Answer 1

When a company raises capital through debt financing, the financing portion of the cash flow statement shows a positive item, as well as a rise in liabilities on the balance sheet. Principal, which must be repaid to lenders or bondholders, and interest are both part of debt finance. Interest payments on debt lower net income and cash flow, even when debt does not dilute ownership. This decrease in net income also results in a tax gain because the taxable income is reduced. Leverage ratios such as debt-to-equity and debt-to-total capital rise when debt levels climb.Covenants are commonly attached to loan funding, requiring a company to achieve particular interest coverage and debt-level restrictions. Debt holders have priority over equity investors in the case of a company's liquidation.