MITCH T.

MINGLANA
BSA 301

DEBT ANALYSIS

1. What are the pros and cons of debt financing? Explain each in at least 50 words.
(50 points)

PROS OF DEBT FINANCING:

 Retain Control.
In debt financing, when the company borrows money from a financial
institution, they are only obligated to pay the principal amount along with its
predetermined interest. The debt financing providers (lender/creditors) does
not have a right to give order in how to run the company. Therefore, debt
financing allows the owner to retain its control ownership and are free to
make decisions as per discretion.

 Nontaxable cost or tax advantage.

In debt financing, interest expenses and charges on a business are tax
deductible if the underlying loan money must be used for business expenses
or purposes. And this is a big incentive for companies/businesses who opted
in debt financing because this reduces their net tax obligation and in the long
run, that certain tax deduction could really outweigh the financial burden of
the company.

 No profit sharing and gives easier planning.

When a company opt to debt financing, their only obligation to the
lenders/creditors is making repayments within the agreed time frames and
they do not have to share their business revenues. And in debt financing, the
company knows exactly how much the principal and interest they will pay
back each month and this makes it easier for them to plan and budget their
finances.

CONS OF DEBT FINANCING:

Despite the benefits of debt financing, it has also its drawbacks.

 Repayments.
One drawback of debt financing is the company has to make sure that their
business is generating much profits not only to cater their expenses but also
to repay the loan plus interest they borrowed from individual or financial
institutional. This becomes a huge burden to the company because they are
 burning cash to make monthly debt service payments. If the business fails,
they are still obliged to repay their debts.

 Require a collateral
In debt financing, it is unavoidable that certain debt financing providers will
require a company to put their assets as a collateral to secure the loan and
this may result to a potential risks of a business. Collateral is a security that
can be used by the creditors in order for them to have a second source of
loan repayment. The creditors/lenders may seize business assets in case of a
default.

2. Distinguish between the 1989 Savings and Loan Crisis and the 2007-2012 Great
Depression. (150 points)

The underlying cause of S&Ls crises was mainly because of the extremely high
interest rate environment. The S&Ls was stuck because most of their assets
were in long term fixed rate mortgages and they often had to pay more to their
depositors than the amount they were making on the mortgages. In late 1970s
and 1980s, inflation rates and interest rates both rose dramatically which creates
two problems for S and Ls. First, the interest rates that the S&Ls pay on the
deposits were set by the federal government and were substantially very low to
what could be earned in any institutions, so this resulted to which the savers of
S&Ls leads to withdraw their fund. Second, the S&Ls is made at long term,
fixed rate mortgages, so when interest rates rose, the mortgages lost a sizable
amount of value. The S&Ls institutions began to recover for this circumstances
but the problem is the regulators because they did not have the sufficient
resources to resolve the institutions that had become insolvent and so which
eventually then wiped out the S&L industry’s net worth.

The Savings and Loans Crisis bought significant bank collapse, it consists of
more than 1,000 of the nation’s savings and loans that had failed during 1989.

In contrast with the S&Ls crisis, there is also a financial crisis exists on 2007-
2021 Great depression. This financial crisis in 2007 caused the breakdown of
trust between the banks the year before the 2008 financial crisis. This due to the
subprime mortgage crisis where the banks sold many mortgages in order to cater
the demand for mortgage-backed securities sold in the secondary market.
Additionally, subprime mortgages are loans granted to borrowers specifically
home loans with poor credit histories and are considered a high risk loan. The
2017 banking crisis and the 2008 financial crisis produced the worst recession
ever since the great depression. The financial crisis bought a downturn to global
economy and devastating the world financial markets including its real estate
industries and banking. It triggered the collapse of housing bubble in the US and
also, the crisis collapses the biggest investment banks in the word (Lehman
Brothers), bought multiple key of financial institutions and businesses to the
verge of collapse.

In early 2009, the interest rates of central banks were cut and it records at low
levels. According to research, the UK cut base rates from 5 percent to 0.5
percent. Usually cutting in interest rates would make the borrowing much
cheaper and encourage the investment and consumption however it is less
effective in this period.

Despite the cut in interests, the UK economy was stalled in 2011 and went into a
severe dip recession. Some felt that this is due to the Governments severity that
drive the 2010-2012 caused a significant factor in recession.

Which crisis are more severe? The 2007-2012 Great Depression was far very
different from Savings and Loans crisis and therefore far more serious than the
crisis that happened in 1989 because they involved much larger financial
institutions whose statement of financial positions are linked in multiple
interconnections. And it was more severe than the financial disturbances that
happen or associated with the onset of the great depression.