What would you recommend to be the capital structure (total liabilities or debt and equity proportions) for each of the three companies below:
i. eBay (NasdaqGS: EBAY)
ii. The Clorox Company (NYSE: CLX)
iii. Alaska Air Group Inc. (NYSE: ALK)
The term debt means the amount which is borrowed by the company. Let us understand the pros and cons:
Disadvantages of Debt financing or Advantages of Equity
1) Increases financial risk
Debt financing can lead to greater financial risk because of higher fixed interest costs and principle re payments. Hence Equity financing leads to less financial risk.
2) Pressure on Cash flows
There is a constant pressure to pay interest and principle which can lead to liquidity crisis. This situation is ...
In 300+ words, the solution explains the advantages and disadvantages of debt and equity in order to come to a conclusion on the kind of capital structure to recommend for these 3 big companies. References included.