Internal control°¶°11. ETHICS The President of Freeman-Industries-Inc. made the following statement-in-the Annual Report-to-Shareholders: "The founding-family-and-majority-shareholders.of the company do not believe in using debt-to-finance-future-growth. The founding-family-learned-from-hard-experience-during-Prohibition and the Great Depression.that debt-can-cause-loss-of-flexibility and eventual-loss of corporate control.-The-company will not-place-itself-at-such-risk-again. As such, all-future-growth-will-be-financed either by-stock-sales-to-the-public-or-by-internally-generated resources."Please-discuss the errors-in-this-logic-and-a-possible-resolution. 1

Capital structure is the combination and mix of debt and equity funds used to finance the business and operations of an organization. It consists of various external and internal funds that the organization uses to fund its operations. The capital structure is normally made up of equity and debt; where equity represents a more permanent and expensive source of capital. Debt, on the other hand, represents a more diversified type of fund. The ideal capital structure of an organization should be the perfect balance between equity and debt funds. Debt is one of the components of the capital structure and provides financial flexibility to the business. Debt decreases the cost of capital for a business as the interest payments to be made for debt financing are tax deductible. The repayment and interest payments of debt have tax benefits that help in securing tax savings. Using only equity financing for future growth will lead to conflicts and loss of control and ownership to the shareholders of the company. By using only equity, the company will have to share its profits with the shareholders and the control will go into the hands of the shareholders. Debt capital will help in making independent decisions and will also provide value to the shareholders as it provides financial leverage to the company. Therefore, using only equity will increase the cost of capital and risk of a business. An optimal balance between debt and equity should be maintained to finance future growth.