This month ... 'since the banking crisis, many companies are aiming to become debt free. But debt is a cheap form of finance, so what should I recommend to my CEO?'.
| Author | Soskin, David |
| Position | CIMA and an entrepreneur answer your questions |
CIMA versus David Soskin
CIMA
The tax benefits of debt interest payments, according to the theory at least, make debt a relatively cheap form of finance. So if your organisation is profit making, and those profits are taxable and your tax jurisdiction treats interest paid on debt financing as tax deductible, then debt is probably significantly cheaper than raising equity finance.
However, the 2008 financial crisis and ensuing period of slow growth have left many banks unwilling to lend, while some companies are averse to borrowing and don't want to depend on the banks for financing new projects. Indeed, many are now hoarding hefty cash reserves.
For some, this is not a new phenomenon. Mastercard, Amazon and Apple have all famously issued zero debt, but in 2012 several previously indebted companies followed suit. In the UK, building giant Persimmon announced...
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