Equity and Debt - Assignment Example

The advantages of choosing equity financing reveal the compelling reasons why AMSC management felt the need to adopt floating shares in the market. Firstly, equity financing allowed the company to obtain a long-term relationship with investors ready to commit money in the company’s projects. Such an arrangement avoids short-term risks where the financial security offered by the funding party comes to an end after some time, such as in a loan agreement. Similarly, most investors in equity deals have preferences in the choice of projects to invest in, which attracts professional entrepreneurs.

In this regard, equity relationships have safer business linkages by pulling passionate investors who add value in terms of business succession. Another advantage of equity financing relates to the overall reduction in outward cash-flow challenges that shrink liquidity. As opposed to debt financing, equity financing adds money to the business in the long-term, thereby reducing outflow challenges. Evans and Mellen (2010) noted a closely related advantage that touches on the long-term outcomes of additional investment without repayment obligations, which increases chances of growth.

The long-term element of the equity relationship secures the growth prospects of a business as opposed to a debt that requires fixed repayment periods. Similarly, the investor bears the risk element of the investment made, which reduces the pressure of compulsory liability as seen in debt financing. The sharing outcomes of the partnership and shared ownership raises the confidence of the equity arrangement in facing risks. From these advantages, the management could have found grounds to make a decision to on engaging shareholders.

As mentioned, equity financing also presents a fair share of disadvantages emanating from the opportunity cost against debt financing and other sources of capital. Firstly, equity financing implies