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Essay / Research Paper Abstract
This 8 page paper considers why firms are increasing their borrowing and the underling reasons, such as the desire to increase value though investment or change. The paper considers the reality behind these perception and the advantages of increasing debt. The paper then looks at the disadvantages of increasing debt and the long term dangers. The bibliography cites 7 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TEdebtin.rtf
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Unformatted sample text from the term paper:
and individuals, as well as reducing the cost of borrowing. The result of this is that the compnay that wants to expand will find a greater opportunity to grow with
the use of debt to finance the operations. This is an understandable strategy, and one which has many advantages and disadvantages. The first
aspect to consider is what is actually classified as debt. This would appear to be straightforward, as capital which is borrowed or liabilities which will fall due are debts. The
FASB defines debt as "a liability as arising from the entitys obligation to transfer assets to others in the future" (Penmann, 2003). The opposite of debt is equity, this is
defined as "the residual interest in the assets of the entity that remains after deducting liabilities (Penmann, 203). This takes an equity view as the common shares are not deemed
to need assets to be issued. However there is a liability owned to the shareholders. Taking this to a less theoretical level, this also leads to one controversial aspect; preference
shares. These are not classified as debt by most ratios as this s the equity view. As this is the dominant paradigm in debt equity calculations it is the approach
this paper will take. The way that the level of debt is measured is with the debt equity ratio is also known
as the gearing ratio. This is the ratio that looks at how much of the capital employed is provided by way of long term fixed debt. This compared the level
of shareholder equity to the level of borrowing. This is calculated by taking the total liabilities less the current liabilities and then dividing this by the capital employed. Generally,
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