Statement 3
Another important issue to consider in the contraction of debt is represented by the impact of this debt on the company stakeholders -- employees, business partners, the public, and most importantly, the share holders. The primary scope of the economic agent is that of creating value for its stakeholders, but excessive debt could jeopardize this desire, especially since debt is money that has to be repaid and it as such reduces the future levels of profitability.
At the level of value creation, a crucial aspect to be analyzed is represented by the source of the debt to be contracted. On the one hand, there is the contraction of debt through loans, which are characterized by the fact that control and ownership of the company remains intact, but payments have to be regularly made; the payments are nevertheless tax deductible.
On the other hand, there is the contraction of debt through equity, which means that control and ownership are adjusted to integrate the new shareholders, that payments in dividends are legally accounted as profits, but that payments are only made when profits are generated and when the board decides to offer dividends. In essence, when contracting debt, economic agents must also consider the impact of the debt on the shareholders.
Statement 4
The decision between debt through loans and debt through equity is more complex than meets the eye. Various economists across the years have assessed the situation and have yet to come to a universally accepted conclusion. Each of debt through equity and debt through loans is characterized by its own specific features, such as legislative framework, repayment, impacts on organizational control and so...
The balanced decision is one in which the company maximizes its chances of profitability at the intersection of the company features and the debt method features.
Statement 5
A final element to be assessed in the decision of debt vs. equity financing is represented by the control of the debt decisions. In some cases, economic agents can only opt for a single type of debt, whereas in other instances, companies opt for a combination of equity and loan debt.
The final decision on the use of a single tool or a combination of the two is strictly pegged to organizational features. The first feature to make an impact at this level is represented by legislation. It could for instance be possible for the firm to be a small economic agent which does not have the right to issue and trade tocks on the public market.
Then, a second feature which impacts the decision of debt vs. equity is given by the actual amount of money which can be contracted. At the level of loans, this amount is found at the intersection of the company's needs and the bank's safety precautions, such as the value of the collateral. At the level of equity however, the amount is given by external valuations on the stock market.
These features only come to support the already stated finding that the selection of the debt methods is complex and there exists no such thing as the perfect recipe. Each economic choose the method and the level and makes other capital structuring decisions based on company specific features.
