Turmoil in the markets" is an article that concerns the plunging stock market prices in the United States. The reason for this is explicated as rising borrowing costs rather than disappointing profits - which are nonetheless also a reality. At the bottom of rising interest rates is investor concern about rising delinquencies in subprime mortgages. Indeed, the housing market has unfavorably affected the debt market as well, also affecting companies in the debt market unfavorably. Bank and broker shares are among the worst hit, and had to absorb unwanted loans. This is easier for larger corporations than smaller ones. The economy is therefore significantly affected by the housing market, which affects not only home loans, but other debts as well.
When taking the above into consideration, I believe that the decision to incur debt is a more complicated one for the financial manager than is suggested by the Modigliani and Miller theory. Indeed, several...
The first important consideration for me as financial manger would be the status of my company. If my cash flow is not yet stable and/or fairly copious, I would limit my debts to a manageable level. If my company is more stable, I would take on more debt than the strict models allow for in order take advantage of the tax benefits. Another important factor is other debt markets, and also stocks and bonds, and the interactions of these. An unfavorable debt market in a large sector such as housing, of example, could severely disadvantage my interest rates while repaying my loans. Hence any tax advantages from these could be cancelled out by high repayment rates. All these factors have an effect upon the final decision to take on more or less debt. Both internal and external factors therefore play an important role in whether the level of debt I would decide to incur for the purpose of saving on taxes.
