What are some reasons for increasing overall levels of corporate debt in recent years? What level...
What are some reasons for increasing overall levels of corporate debt in recent years? What level of risk could happen for another recession as a result? In terms of financial statements, what effects can debt have on the overall health of a company, positive or negative?
Homework Answers
- Reasons for increasing overall levels of corporate debt in recent years:
- A surge in government borrowings.
- Due to the financial crisis, companies are shifting towards bond financing.
- Risk in Market.
- Debt growth in nonfinancial corporations.
- A major shift of corporations from loans to bonds.
- Level of risk could happen for another recession as a result:
- It will reduce consumer confidence and can have a great impact on the company.
- The profit margins of the company will a bit of concern.
- Business investment will slow down.
- Effects can debt have on the overall health of a company:
Positive Effect: (i) There is a deduction in interest on the debt from corporate income taxes. (ii) As equity is much riskier than debt so debt is a cheap source of finance. (iii) Debt is much risky because it is the obligation for a company to pay.
Negative Effect: (i) It will seize the opportunities for the company. (ii) The company can turn to insolvency too. (iii) It impacts the credit rating of the company.
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