Q1. During a convention cocktail party you overhear a group of healthcare financial officers discussing ‘financing policy'. One finance officer wearing a black suit says that ‘control' is primary so debt should always be maximized. Another finance officer in a green sweater declares that ‘risk' is paramount and must be minimized. A third finance officer in a tracksuit insists that maximizing ‘income' is the only way to go.
Decide whether you agree with black suit, green sweater, or tracksuit. Write an elevator speech (10 sentences) citing and defending your view."
Q2. The following argument is made in support of ""black suit"". In 8 sentences, please state whether you agree or disagree with this argument, and why?
Personally, I think the debt argument is the most reasonable when trying to raise capital. It has significant advantages over equity, when done within reason.
1. Debt financing is generally available assuming your business has a good credit rating.
2. Interest payments and bank fees are tax deductible making them more efficient then equity. Costs for raising equity include legal, travel and accountant fees that are not tax deductible and can eat into 3-5% of the raise.
3. Debt is flexible with minimal initial cash flow impact can be short or long term based on the needs of the company. Equity is a long term commitment that cedes control of the company to others.
4. Debt has few compliance issues short of making the payments on time. Equity has cumbersome finance issues and regular reporting.
5. Risk - Debt can be a risk if the company becomes overextended and defaults. Careful debt capacity analysis prior to taking on additional loans help mitigate this risk.