Week 4 Discussion 1 & 2 Classmate Response

Week 4 - Discussion Forum 2

Guided Response: Review the posts from your classmates and respond to at least two. Compare and contrast the points you and your classmates made regarding the impact of time value of money on capital investment decisions. Each response should have a minimum of 100 words.

There are two of my classmate’s discussion plus my instructor that is on this document. I need to respond to each one. James Varughese

and Ruben Alvarado and my instructor Melody Clements

James Varughese

Benefits and drawbacks of corporate debt

One of the biggest benefits of debt is that the interest payments are tax-deductible, and it also helps clearly define the financial obligations (Block, Hirt, & Danielsen, 2019). Debt could be used for an ambitious project and take up growth opportunities. On the other hand, there are multiple drawbacks to corporate debt. Interest and principal payment are defined by the contract, and it is mandatory to meet the financial obligation regardless of the financial condition of the organization. Sometimes the contracts have certain restrictions for the organization to follow, which is mandatory for the organization to follow (Block, Hirt, & Danielsen, 2019). 

Assessment of the company’s debt structure

Analyzing a company’s debt structure provides a good understanding of the company’s liabilities and its ability to pay the outstanding loans. Financial managers can use the debt ratio to evaluate the company’s debt structure. The debt ratio is a ratio of total debt to total assets (Investopedia, 2020). Lower the debt ratio is better, but it depends on the type of industry. Industries with high capital tend to have a high debt ratio, and industries with low capital tend to low debt ratio. Industries with high debt ratios and low assets are a risky investments.

Deciding factors for increasing or decreasing the company’s debt

Debt-to-Equity Ratio is another useful tool in addition to debt ratio which financial managers can use to assess the financial condition of the company and to develop financial strategies. The debt-to-equity ratio focuses on the amount of debt used to run the business, it is a ratio of total liabilities to total equity (Ohio University, 2020). It provides a good understanding of the financial condition of a company which compares with others in the similar industry. A good healthy balance of debt and equity is an efficient way to run and expand the business. Bases on debt-to-equity ratio managers can decide whether the company’s debt should be increased or decreased.

 

Reference:

Block, S. B., Hirt, G. A., & Danielsen, B. R. (2019). Foundations of financial management (17th ed.). Retrieved from https://www.vitalsource.com/ (Links to an external site.)

Investopedia. (2020, April 30). Retrieved from Debt Ratio Definition: https://www.investopedia.com/terms/d/debtratio.asp (Links to an external site.)

Ohio University. (2020, April 30). Retrieved from Why the Debt-to-Equity Ratio Matters in Capital Structure: https://onlinemasters.ohio.edu/blog/why-the-debt-to-equity-ratio-matters-in-capital-structure/ (Links to an external site.)

 

Ruben Alvarado

Many people, including me, look at debt as a negative fact that is a part of their lives.  However, the truth is that debt is not as bad as most people think.  Business debt can be subsidized through investment opportunities.  On an individual level debt is also good as it helps to improve credit standings if a company has a good amount of debt, it can show that the company size and potential growth.  The company that has a balance between debt and earnings can achieve a lot.

There is only one problem that if the debt becomes too much the company cannot pay it back and may have to file for bankruptcy.  Too much debt is bad and is unmanageable, which could end the life of a company.  The financial managers will have to constantly watch and monitor the cash flow, balance sheet, and debt ratio.  This will indicate the health of the company, and the needed direction that the company will need to go.

The decision to increase or decrease debt is dependent upon the health and the liquid income of the company.  This will have to be measured by which the company can grow or is going out of control.

Melody Clements

Washburn & class,

Thank you for your post!  To expand our discussion a bit, could you explain what the differences are between factoring receivables with recourse or factoring receivables without recourse?  Are these accounted for as a sale or as a borrowing, and why?

Best regards,

Mrs. Clements