Source of capital structure a structure b
When considering the different capital structures available for a business, it is important to evaluate both the leverage and risk associated with each one before making a final decision. Primarily, debt-based financing options provide more leverage since these involve borrowing money which can then be used to generate profits faster compared to equity-based arrangements. Additionally, they often come with lower interest rates as well which helps keep overall costs down.
On the flip side though, this increased levels of borrowing also increases risk significantly since there is an obligation to repay borrowed funds plus any related interest charges that may accrue over time too. Furthermore, if business fails it will likely default on its loan payments – potentially leading creditors to pursue legal action in order collect what is owed or worse.
Therefore when looking at our example here where firm’s EBIT is expected exceed $75k annually I would recommend going for a debt-based structure due to higher levels of leverage and relatively low cost associated with such option. However it should also be noted that by taking this route we are exposing ourselves additional risks so caution must be taken in order ensure that all potential outcomes have been weighed prior making any commitments.
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