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John Moffat.
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toushiga
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Hello Tutor,
For past year exam June 2008 Q2 part (e),The examiner answer: “If THP Co expects buoyant economic conditions and increasing profitability in the future, it will be more prepared to take on
fixed interest debt commitments than if it believes difficult trading conditions lie ahead.”I doubt about why the business will be more prepared to take debt instead of equity in the economic boom? What is the reason?
Thank you.
John Moffat
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If sales increase, then if there is fixed interest payable the profit available for shareholders will increase at a greater rate than the increase in the sales.
I explain this in my lectures on example 1 of Chapter 13 of our lecture notes.
toushiga
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