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Discussion – Debt Obligations

Discussion – Debt Obligations

Enterprises enter into debt as a means of raising working capital or capital expenditure. During establishment, start-ups seek debt as a means of financing the business. Also, in the course of operation, companies require capital expenditure, such as when purchasing plants and equipment. Such investments call for long-term debt. On the other hand, short-term debts such as bank overdrafts and trade credit are required for the daily operation of a business. Companies can enter into debt through bonds, mortgages, or long-term loans. Bonds refer to instruments issued by the firm at a pre-stated rate (premium) and have a maturity date. Mortgage refers to asset acquisition undertaken through credit. Long-term loans refer to credit offered by a bank to be paid over a significant period at a pre-determined interest rate depending on the debt covenant  (Sokolyk, Cole &, 2018). Debt management is essential in reducing the expenses associated with borrowing.

An increase in debts results in an increase in the financing activities section. On the other hand, the operating activities section declines since more cash is channeled into paying the debt interest. However, debt is pivotal in business operations, as it composes a significant part of the capital structure. This renders debt obligations necessary in a business. However, debt should be effectively managed to ensure it enhances the firm’s profitability. For instance, ensuring that debts are paid on time is vital to avoid interest accumulation. The Bible advises practicing shrewdness when managing a business, which is a lesson business managers should emulate. Also, the Bible advocates integrity and honesty in all matters related to finance. Business managers should emulate these virtues by ensuring that financial statements reflect a true and fair view of the business position. Managers should not attempt to conceal the amount of debt owed by the firm.

References

Cole, R. A., & Sokolyk, T. (2018). Debt financing, survival, and growth of start-up firms. Journal of Corporate Finance, 50, 609-625.

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Question 


Discussion - Debt Obligations

Discussion – Debt Obligations

Discuss the reasons for and methods by which companies enter into debt obligations and the importance of managing that debt. Include a discussion of the impact of decreasing or increasing debt on cash flows. Should companies owe or be debt free? Review the biblical passages provided in Biblical Perspectives in this session and throughout the course (or from your own research), and discuss how the Bible can guide managers in their liability decisions.

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