Get premium membership and access questions with answers, video lessons as well as revision papers.
Limitations of debt finance/ disadvantages of using debt finance to the company.
1. Interest is a legal obligation and failure to pay it may lead to company into receivership and consequently liquidation.
2. Using debt finance entails conditions and restrictions as to its use and this makes it non-flexible finance which can only be invested in those ventures approved by the lenders.
3. Its use on large scale increases the company’s gearing level which exposes the company to incidences of receivership and thus liquidation.
4. It is not usually long-term finance and the payment of principal leaves the company in financial strain and may cause liquidity problems to the company.
5. the use of excessive debt finance; beyond 67% level puts the company at the mercy of the lenders because they can come in to control their interests which dilutes the control of owners and this may lead to lower share prices.
lydiajane74 answered the question on May 9, 2018 at 19:35
- Outline requirements a company must meet before raising debt finance(Solved)
Outline requirements a company must meet before raising debt finance.
Date posted: May 9, 2018. Answers (1)
- What are the disadvantages of using retained earnings as a source of finance to the company?(Solved)
What are the disadvantages of using retained earnings as a source of finance to the company?
Date posted: May 9, 2018. Answers (1)
- What are the advantages of using retained earnings as a source of finance to the company?(Solved)
What are the advantages of using retained earnings as a source of finance to the company?
Date posted: May 9, 2018. Answers (1)
- Explain why SACCOS are popular among employees(Solved)
Explain why SACCOS are popular among employees.
Date posted: May 9, 2018. Answers (1)
- What are the requirements for the registration of a business name?(Solved)
What are the requirements for the registration of a business name?
Date posted: May 9, 2018. Answers (1)
- Give circumstances under which partnership is illegal (Solved)
Give circumstances under which partnership is illegal
Date posted: May 9, 2018. Answers (1)
- State four differences between power and authority(Solved)
State four differences between power and authority
Date posted: May 9, 2018. Answers (1)
- Outline five features of authority.(Solved)
Outline five features of authority.
Date posted: May 9, 2018. Answers (1)
- Outline six traits of a good leader.
•(Solved)
Outline six traits of a good leader.
Date posted: May 9, 2018. Answers (1)
- Outline nine principles of management according to Henry Fayol.(Solved)
Outline nine principles of management according to Henry Fayol.
Date posted: May 9, 2018. Answers (1)
- Describe five management styles.(Solved)
Describe five management styles.
Date posted: May 9, 2018. Answers (1)
- State five characteristics of perfect competition(Solved)
State five characteristics of perfect competition
Date posted: May 9, 2018. Answers (1)
- Outline the limitations of accounting(Solved)
Outline the limitations of accounting
Date posted: May 9, 2018. Answers (1)
- Outline the characteristics of accounting reporting.(Solved)
Outline the characteristics of accounting reporting.
Date posted: May 9, 2018. Answers (1)
- Outline four internal business environments.(Solved)
Outline four internal business environments.
Date posted: May 9, 2018. Answers (1)
- Describe five types of business activities.(Solved)
Describe five types of business activities.
Date posted: May 9, 2018. Answers (1)
- Effects of outward shift in a supply curve on equilibrium price and quantity(Solved)
Effects of outward shift in a supply curve on equilibrium price and quantity
Date posted: May 8, 2018. Answers (1)
- What are the disadvantages of sales promotion?(Solved)
What are the disadvantages of sales promotion?
Date posted: May 8, 2018. Answers (1)
- Outline advantages of sales promotion(Solved)
Outline advantages of sales promotion.
Date posted: May 8, 2018. Answers (1)
- Explain factors which determine choice of an advertising medium(Solved)
Explain factors which determine choice of an advertising medium.
Date posted: May 8, 2018. Answers (1)