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If Debt and equity is used 3n the other hand if company use debt financing then,Interest on load
amount 1 +------ ( / 1 +----%a#able income is 1 +----- 2 +---- 1 +0----%a#
payable 1 +0---- ( .0 1 ---- $fter ta# income is 1 +----- 2 ---- 1 +04---!rom the
e#ample it is clear that because of debt financing ()* Company is paying lessamount of ta# which
increases the net income after ta#. 5ormally company making profit of +0---- but because of
using Debt Company is making profit of 04---. %hat"s why companyprefers debt financing.&et
us consider other e#ample6 ()* company take loan at the rate of 7/ and corporate ta#rate is 0-
/.8ere cost of debt capital is 7/ but because of using debt capital company"s cost of capital for
debut is 7 ( 9 2 0-/: 1 4.;-/. Cost of capital is reduced because of ta# deductibility featureof
debt financing.'o we can say that debt can be cheapest source of financing for the company. +
.Di2erenciate "etween 0nancial and "#siness risks1Answer 3inancial Risk 3inancial risk re!ers to
te cance a "#siness4s cas 5ows are not eno#& to /a% creditors and !#l0ll oter
0nancial res/onsi"ilities. Te level o! 0nancial risk6 tere!ore6 relates less to te "#siness4s
o/erations temselves and more to te amo#nt o! de"t a "#siness inc#rs to 0nance tose
o/erations. Te more de"t a "#siness owes6 te more likel% it is to de!a#lt on its 0nancial
o"li&ations. Takin& on i&er levels o! de"t or 0nancial lia"ilit% tere!ore increases a
"#siness4s level o! 0nancial risk. 7#siness Risk 7#siness risk re!ers to te cance a "#siness4s
cas 5ows are not eno#& to cover its o/eratin& e/enses like cost o! &oods sold6 rent and
wa&es. 8nlike 0nancial risk6 "#siness risk is inde/endent o! te amo#nt o! de"t a "#siness owes.
Tere are two t%/es o! "#siness risk$ s%stematic risk and #ns%stematic risk. 7#siness risk is
te /ossi"ilit% tat an or&ani9ation4s o/erations or com/etitive environment will ca#se it to
&enerate 0nancial res#lts tat are worse tan e/ected. 3inancial risk is te /ossi"ilit% tat
te #se o! de"t to 0nancial o/erations will ave a ne&ative im/act on earnin&s. Business isk
s !inancial isk = %he running of businesses inoles a considerable amount of risk. It is
important for business owners and entrepreneurs to identify and understand the arious risks
inoled in running a business so that they can adapt their business strategies to deal with such
risks in a better manner.= !inancial risk is the risk that a business will not be able to generate
enough cash flow and income to pay their debts and meet their other financial obligations.=
Business risk is the risk that a business faces in not being able to generate adequate income to
coer operating e#penses.= !inancial risk can arise from olatile interest rates, e#change rate
risk, and company"s debt to equity ratio, etc.= Business risk can arise from a number of factors
such as fluctuations in demand, market competition, costs of raw materials, etc.= Business risk is
independent of the portion of the debt that a business holds, as opposed to financial risk that is
ery much influenced by the leel of debt. , .Disc#ss te di2erent a//roaces o! 0nancin& o!
workin& ca/ital re:#irements1Answer Working capital is a measure of the company"s efficiency and
short term financial health. It refers to that part of the company"s capital, which is required for
financing short>term or current assets such a cash marketable securities, debtors and inentories.
It is a company"s surplus of current assets oer current liabilities, which measures the e#tent to
which it can finance any increase in turnoer from other fundsources. !unds thus, inested in
current assets keep reoling and are constantly conerted into cash and this cash flow is
again used in e#change for other current assets. That is why working capital is also known as
revolving or circulating capital or short-term capital

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