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Hi, need to submit a 2500 words essay on the topic Capital structure.ure of an organization. however, the uptake of debt has several implications to a business, first, debt leads to an organization ha
Hi, need to submit a 2500 words essay on the topic Capital structure.
ure of an organization. however, the uptake of debt has several implications to a business, first, debt leads to an organization having to increase the business risk. The enterprise’s business risk goes up due to its high contribution to the enterprise, in this case, the high contribution of debt such as in option one leads to the debt holders having a high control of the enterprise. As a result, the organization or investment becomes vulnerable for takeover, if the business does not meet the interest payments, as goes into bankruptcy. Secondly, reduces the stake of the enterprise shareholders in that they have to work on servicing the debt at the expense of making profits, which a business’s prime objective(Martin & Baker, 2013).
In the consideration of debt options, it is important to consider the debt period, in most cases, long-range debts are highly favorable since the organization utilizes the funds for a long period before repaying the sum value of the bond. Hence, the organization is able to enjoy a return on the investment and even re-invest the excess funds or paid dividends to equity and other shareholders in the business.
Short time range bonds such as option three, four and five negatively affects business shareholders, this is because, the business is forced to source for funds and pay the creditors irrespective of whether it has generated profits or not, the bottom line is that the business has a responsibility to repay the funds within the agreed period. Given the long-term nature of projects, the funding requirement leads to complications, as the return may not be realized in good time to pay the sum value as per that date. When this situation arises, the business becomes ripe for takeover according to the provisions of business law.
In the light of these, careful considerations have to be made before the business can settle on certain kinds of financing and the activities upon which funding is needed. Careful evaluation can give the