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Q&A Forum

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?




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.

Rich Rotondo
Title: Manager
Company: Nyl
(Manager, Nyl) |

Its really more of a financing question. Meaning how will the cash be used and is the return acceptable to warrant the cost of the debt? Using debt vs equity uses similar analysis since more equity can dilute the company whereas debt does not.


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