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Debt and Equity

Ravi Ramcharan's Profile

Dear All,

I know it is common knowledge that a company should have some debt. Is it because of only the tax benefit?

What about if a company has no debt but abundant cash reserves and healthy cash flow?

There is a family company that I do work for. They only have 3 shareholders and don't pay much dividends as they prefer to leave it in the company. They do pay but maybe just once a year and even this is not a big amount.

Would it make sense for them to take on some debt? If so then what are the advantages of so doing?

Thanks,

Ravi

Answers

Maqsood Hassan
Title: Manager Tax
Company: Rafiq Spinning Mills (Pvt.) Limited
(Manager Tax, Rafiq Spinning Mills (Pvt.) Limited) |

As I know the matter here in my country. People tend to avoid related party transactions in order to stay away from tax authorities. Related party transactions are always under scrutiny.
I your case, it is not a big deal if they obtain a loan. There may be tax on dividend.

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