discussion post response

student # 1
Debt financing in the long run does turn out to be more expensive as a result of interest accrued from borrowing the money. This higher cost, however, does not necessarily mean that profits will be lowered. Lets say that the firm is financing something that will bring in exponential long term profits. This firm has to finance a large sum of money for the construction of a new facility. The money it takes to build the facility may be much lower if the money is not financed (the principal amount) but the firm may not be able to afford building a whole new state of the art facility out of pocket. In this case, the firm may borrow money with the extra cost of interest. Without the extra cost of the interest the firm may not have been able to afford the construction of the new building. The extra money it takes to finance the construction will most likely result in more profits once the new facility is up and running.  The financing of a new clinic may be vital to future profits.

Student #2
Debt financing is when a firm raises money for working capital by selling bonds, bills, or notes to individual or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principle or interest on the debt will be repaid. Although debt financing does lower the profit for the firm, it also can increase the return on equity. Return on equity measures the rate of return to the owners of the business. With an increased return on equity, it brings increased risk. Higher returns can be obtained only by assuming this greater risk. If revenues were less than expected, and operating costs were more than expected, using the 50 percent debt financing would increase the interest expense. This could potentially put your business at risk for bankruptcy. Personally, if I had a business, I would rather use the all equity method to avoid losing profit and having increased risk. I think that debt financing should be used as a last resort if a business can not put all the money up front.

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