question 19: debt and long term funds Flashcards
Analyse how this change may affect the level of dividends received
Having more debt must have profit and efficient funds to pay back the loan and the interest on the loan
This being a long term loan, means the business can spread out the cost of the loan ensuring they are not paying upfront but maybe in smaller amounts.
There are benefits such as interest rates being low. This means the business will only pay back a small amount on top of what they are required
However external factors such as cost of living crisis or recession may lead to interest rates going up and businesses have to pay back more and this might be an issue as most of their revenue will be going towards paying back their loan and they might receive less dividends because they are paying back loan.
