Discuss the leverage and risk aspects of each structure. If the firm is fairly certain that its EBIT will exceed $75,000, which structure would you recommend? Why?

Source for capital structure A structure that b

Before making any final decisions about the various capital structures that are available to a company, you need to consider both the risk and leverage associated with each. Due to the fact that debt-based financing can be more leveraged than equity-based, these options involve borrowing money. This allows for faster profits. They often have lower interest rates, which can help keep costs down.

This increased borrowing can also increase the risk of default as you will have to repay your borrowed funds and pay any associated interest. Furthermore, if business fails it will likely default on its loan payments – potentially leading creditors to pursue legal action in order collect what is owed or worse.

Therefore when looking at our example here where firm’s EBIT is expected exceed $75k annually I would recommend going for a debt-based structure due to higher levels of leverage and relatively low cost associated with such option. This route comes with additional risk so be careful and weigh all possible outcomes before making any decisions.

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