Theoretically how should a business choose between borrowing...

Theoretically, how should a business choose between borrowing and equity in its capital structure? Select an answer: They should choose to borrow, because interest payments are tax-deductible. They should disregard taxes and transaction costs in making the decision. They should choose equity, because dividends paid to shareholders are tax-deductible. They should choose equity, because companies with debt are less efficient and experience more employee slack.

Transcript

00:01 Hello students, here is a question.

00:02 Why is an ideal capital structure with no owner's equity and 100 % borrowing not realistic? so, this is our question.

00:09 We have a few options given here.

00:10 We have to choose the right answer from this.

00:13 The first is, lenders will be, lenders will be wary of a company, wary of a company with a high amount of debts, a high amount of debts.

00:36 So, this is true because lender wants to ensure that company can repay the borrow fund and higher amount of debts can be increased to the risk of default.

00:44 When it comes to the second statement, when the company realizes borrowing, employee trend towards lower productivity.

00:50 So, this is not true.

00:52 This is a direct reason why an ideal capital structure is not realistic.

00:56 And the next statement will, owners will want to say in how the business is run.

01:03 Owners will want to say in how the business is run.

01:17 So, this statement is true because owner who have invested their own money in the company will want to have to say how the management has operated.

01:26 And the next statement, you will lose the tax benefits, you will lose the tax benefit of paying dividends to owners.

01:45 So, this statement is not direct reason why the ideal capital structure is not realistic, but this is true.

01:51 The company can be benefited from the tax deduction on a dividend paid to the owners.

01:56 And the next question is how to discount the working capital budget.

02:01 So, increase in a cash flow or discounted increase in the cash flow.

02:11 So, the question is how does discounting work in capital budget? increase in cash flow will help to discount the working balance sheet.

02:19 The statement is not true because the discounting used to calculate the present value of a cash flow, not just seasonal increase.

02:27 So, the next statement is future cash flow or discounted in a realistic expectation...

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