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Best mix of debt and equity financing for a new enterprise

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Recommend the best mix between debt and equity financing if you were starting a new enterprise. Back up your recommendations with facts and analysis.

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The solution provides a recommendation for the best mix between debt and equity financing if you were starting a new enterprise.

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Debt-Equity Mix

For a new enterprise the best mix of debt equity financing depends on the risk and return that management assumes for the enterprise. Also the nature of business plays a main role in deciding the debt equity mix for the company. There are enormous amount of incentive to increase the amount of debt in the capital structure. As we know that return on equity of the company is double taxed where as interest is tax deductible and due to this the cost of debt is lower than the cost of equity. But a higher debt could lead to the financial risk of greater leverage, also called the risk of bankruptcy. ...

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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