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In times of recession and boom which type of source of finance is more suitable in relation to debt and equity please explain ….i read some where that in times of recession fixed debt commitments are more suitable ? Cannot understand why ?
It depends on the circumstances.
However usually in a recession equity finance is better. The reason is that more debt borrowing means more fixed interest and this means that as profits before interest fall then there is a greater fall in the amount available for dividends. This is revision from Paper FM (was F9) and is explained with examples in my free lectures.
Also, if there is more debt borrowing then there is more risk of the company being forced into bankruptcy if profits fall and they cannot meet the interest payments.
The only real potential benefit there can be of more debt borrowing is that in a recession interest rates are likely to be lower and so it can be a cheaper source of finance.
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