COMMERCE 1AA3 Lecture 27: Class 27
10 Mar 2017
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Document Summary
Debt is used for nancing the acquisition of assets/ The capital structure is the mix of debt and equity. Debt nancing is cheaper, but it is riskier because interest payments are legal obligations. Debt is cheaper than equity sometimes because the returns on your other possible investments with your equity could be higher than the cost of interest (2. 6%). If the returns on your investment is 10%, it makes more sense to borrow money and then put that into an investment with high returns, and then also use your own equity for even more investments with high returns. You must balance the risk of debt nancing with the possible bene ts. A current liability requires repayment within 1 year. Current liabilities are expected to be paid back with current assets, or the creation of new current liabilities. Short-term debt that expected to be re nanced is not classified as a current.
