Corporate Debt in Financial Management: Analyzing Benefits and Risks

This report critically analyzes the benefits and risks associated with incorporating corporate debt into an existing portfolio of debt and equity. It highlights the importance of maintaining a competitive position through effective capital management and discusses various capital structure theories, including trade-off theory, pecking order theory, and modified pecking order theory. The report outlines methods of debt financing such as bank loans, overdrafts, mortgages, credit cards, hire purchase, and leasing. It details the benefits of incorporating debt, including tax deductions, low-interest rates, retention of ownership, and growth potential, while also addressing risks such as collateral requirements, credit rate impacts, and cash flow issues. The analysis is supported by references to academic books and journals, providing a comprehensive overview of corporate debt financing.

CORPORATE FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
 PART A
 Methods of debt financing
 Benefits of incorporating debt into existing portfolio
 Risk related with debt financing
 References

PART A
Critically analysing the benefits and risk to a company regarding incorporating corporate debt into
existing portfolio of debt and equity
 In order to maintain the competitive position in industry it becomes essential for the organization to be
prompt and effective in ensuring that firm is having sufficient level of capital.
 In the present business environment it becomes essential for the organization to be ensure that it has
suitable capital structure theory that can allow RR Ltd to obtain greater amount of benefits and ability
to mitigate associated risk.
 There are various theories regarding the capital structure formulation which can aid an organization
to ensure that firm is implementing effective strategy (Cline, Fu and Tang, 2020).
 Capital structure is constructed by deciding proper proportion of equity and debt in turn cost of
utilizing resource so can be decline to maximize profitability & sustainability.

CONTINUED.
 The different kinds of theory that can help RR Ltd to get confidence that particular decision is worthy
or not.
 It includes trade off, pure and modified pecking order theories which play essential role in providing
accurate and fair information so that its principle and actual activities of business can be compared.
 Trade off theory of financing helps in assessing how much debt & equity finance is to use by
balancing the cost and benefits.
 Pecking order theory provides assistance to enterprise that realize that it should pay attention on
internal utilization of retain earning resource.
 Modified pecking order theory can allow firm to predicts that firms are increasing retire debt when
bankruptcy risk inclines .

METHODS OF DEBT FINANCING
Bank loans Overdraft Mortgage Credit cards Hire purchase Leasing , etc.

BENEFITS OF INCORPORATING DEBT
INTO EXISTING PORTFOLIO
Tax Deduction Low interest rates are
available
Fuel for achieving
growth
Retention of ownership Eliminates the reliance
on expensive debt

RISK RELATED WITH DEBT
FINANCING
Requirement of
collateral
Impact credit
rate
Formulates cash
flow issues Other risks

REFERENCES
Books and Journals
 Almaghrabi, K. S., Opong, K. and Tsalavoutas, I., 2021. Compliance with pension‐related mandatory disclosures and debt financing. Journal of
Business Finance & Accounting. 48(1-2). pp.148-184.
 Caragnano, A. and et.al., 2020. Is it worth reducing GHG emissions? Exploring the effect on the cost of debt financing. Journal of Environmental
Management. 270. p.110860.
 Cline, B.N., Fu, X. and Tang, T., 2020. Shareholder investment horizons and bank debt financing. Journal of Banking & Finance. 110. p.105656.
 Kreß, A., Eierle, B. and Tsalavoutas, I., 2019. Development costs capitalization and debt financing. Journal of Business Finance & Accounting. 46(5-6).
pp.636-685.
 Muhammad, H., Migliori, S. and Mohsni, S., 2021. Corporate governance and R&D investment: the role of debt financing. Industrial and Corporate
Change.
 Omoshagba, T. P. and Zubairu, U.M., 2018. A Systematic Review of the Field of Debt Financing. Covenant Journal of Entrepreneurship. 1(3).
 Raimo, N. and et.al., 2021. Integrated reporting quality and cost of debt financing. Journal of Applied Accounting Research.
 Tuhkanen, H. and Vulturius, G., 2020. Are green bonds funding the transition? Investigating the link between companies’ climate targets and green debt
financing. Journal of Sustainable Finance & Investment. pp.1-23.