Analyzing Liabilities for Decision Making Debt

Analyzing Liabilities for Decision Making-Debt
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Analyzing Liabilities for Decision Making-Debt
Debt is a form of capital financing. Most companies have a mix of debt and equity in their capital structures. In determining the optimal mix of debt and equity, companies will always seek to secure their bottom line. The ultimate decision on the choice of debt financing depends on the size and age of the company. Many small businesses utilize bank debts, whereas large firms adopt mixed debt financing. Taking on debt can drive up profitability for some companies.
Companies apply the ‘trade off theory’ in making their choice of debt financing over equity financing. According to the trade-off theory debt will always be cheaper than equity because it is possible to deduct tax from the interest on debt. The interest on debt is tax deductible thereby reducing a company’s tax obligation (Martinez, 2017). On the other hand, shareholder equity is considered expensive since the...