Question 13.1 Critique this statement: The use of debt financing lowers the net income of the firm and hence debt financing should be used only as a last resort ." Debt financing occurs when a firm raises money for working capital or capital expenditures by selling debt instruments to individuals and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid . The debt financing is a term used to represent the borrowed money received from outside with the agreement to pay back the principal with interest. When the debt financing increases, the net income of the borrower decreases but it will also give tax benefit. Debt financing should be used only as a last resort because debt financing can damage the financial stability of the company. In debt financing, the company needs to pay back the borrowed money including interest, and sometimes they will suffer due to limited cash flow and difficulty in pay back the money. 13.2 What is meant by a firm's debt capital. Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a company, typically as growth capital, and is normally repaid at some future date. capital that a company acquires by incurring debt. This type of business capital holds tremendous value as a source of finance. It enables a company to leverage fortunate financial circumstances into obtaining capital without selling portions of its equity or ownership. Debt capital is acquired by using a security of the company as collateral to receive a loan from an investor. This investor is issued a debenture in exchange for the loan. Debt capital exchanges normally involve the investor receiving a fee or interest payment for their investment. Investors who are issued debentures hold a security, are creditors of the company, and are entitled to interest payments. One of the main characteristics of debt capital that sets it apart from equity capital is the fact that the company goes into debt to acquire capital
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