For a company having more debt is good or having more equity is good ? pls explain in detail.
shwetha
(CWA learner)
(447 Points)
Replied 22 November 2011
Khanna.....
Having more equity also we can apply same concept know. actually my doubt is ....... debt means getting fund from outsiders and equity means getting fund from shareholders. how can debt become good?
Spending debt money on fixed assets is good? orelse spending equity money on fixed assets is good?
sripal
(article)
(68 Points)
Replied 23 November 2011
proportion of debt or equity depends upon the rate of return the company earns. there's a simple concept called leverage.
suppose the rate of return on investments in higher than the cost of debt then more of debt in beneficial.
following illustration will help you.
Roshan A
(Chartered Accountant)
(458 Points)
Replied 23 November 2011
| Originally posted by : sripal | ||
 |
proportion of debt or equity depends upon the rate of return the company earns. there's a simple concept called leverage. suppose the rate of return on investments in higher than the cost of debt then more of debt in beneficial. |
 |
A precise and proper explanation...Agreed!!!!
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 23 November 2011
Dear Students
Is this Return on Investment as explained by sripal is the return on equity i.e the expectation of shareholders or it implies any thing else?
Can any one make me understand that so that this concept gets digested in my muddy brain
Nagam saisameer
(CA FINAL )
(170 Points)
Replied 23 November 2011
Normally Having Debt is cheaper than equity beacuse debt can be is repaid with certain Interest whereas equity is more cost since, the expectations of share holders are high from the profits.
Thanks and Regards
Roshan A
(Chartered Accountant)
(458 Points)
Replied 23 November 2011
Sir
ROI is what COMPANY is expecting to earn on its investment & not what shareholder is expecting from the company(by investing in the company)....Shareholders expectataion is Cost of equity for the company...Hope u understood it
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 23 November 2011
Mr Roshan Thanks
But May I know is this return an expectation ? or any formula to work out return on investment by a company say 15% on trend 1 in the example and 25% on trend 2 in example given by sripal? can u explain if possible
Roshan A
(Chartered Accountant)
(458 Points)
Replied 23 November 2011
Yes the formula for calculating ROI is EBIT / TOTAL CAPITAL ,
EBIT=SALES-(Variable+Fixed Cost)
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 23 November 2011
Many Thanks Roshan I really learnt something today
Phalgun
(Audit Manager)
(327 Points)
Replied 23 November 2011
For any company both debt & equity has to be balanced. Having more debt leads to financial risk. Having more equity leads to over capitalisation. To have Financial leverage one needs to blend both in a proper ratio. For which a good financial manager is required to analyse & act upon.6
CA Arun Chhajer
(GST Faculty @ Ministry of MSME Govt of India)
(2813 Points)
Replied 23 November 2011
Hi,
To answer the main question......As one frnd rightly said Debt is cheaper than equity hence company should raise fund from Debt as well to take the benefit of leverage. As there are two benefit on Debt -
1) Less rate of Interest and
2) Tax Deductible Expenses ( means allowable expenses while calculating Tax)
Further company should also take into account the Debt Equity Ratio ( Formula DEbt / Equity), which ideally should not be more than 2:1. Higher the ration high risk for the company.
Regards
Arun
shwetha
(CWA learner)
(447 Points)
Replied 24 November 2011
thanks to everybody who participated in this discussion. cleared my doubt.
GSTR 9 and 9C for FY 23-24 as amended by Notification 12/2024 dated 10th July 2024(with recording)
CAclubindia
