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Business Financing and the Capital SStructure - Assignment Example

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One has to do critical comparison of the two methods of business finance to come up with an optimal solution that they can use to raise additional…
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Business Financing and the Capital SStructure
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"Business Financing and the Capital SStructure"

Download file to see previous pages This fact ensures that there is no dilution of the company’s ownership. Second, the company is entitled to pay the amount they borrowed plus a predetermined interest. This implies that the company can budget efficiently on how to repay its debt. It does not have to share the future profits of the company in any case the company becomes successful. The interest paid on the debt that the company takes are taxation allowable expenses. This implies that the interests can lower the amount of tax a company pays resulting to it lowering the overall cost of capital. The process of raising debt finance is simple and easy since the company is not entitled to comply with any securities regulations and laws. Lastly, in debt finance the company does not have to hold periodic meetings to explain their various actions to the debt holders.
Despite the many advantages that debt finance has, it also has some disadvantages. First, unlike equity, there must be payment of the debt at some point in time creating obligations to the company. Debt financing also come along with fixed costs which at times can be high. High interest costs increases the risk of insolvency of a company especially on difficult financial periods. Lastly, debt financing require companies to pledge their assets as collateral.
Equity financing generates large amounts of money which do not require repayment. What the company has to do is to only share a portion of their profits to the new investors who become part of the company. The company can use this non-refundable money to expand their operations or diversify its business to generate future cash flows. Equity finance also helps the company to maintain a low leverage which would increase its chances of getting debt finance in the future. The major disadvantage of equity financing is that the company has to loose part of the ownership of the company to the new investors and they will have to take part ...Download file to see next pagesRead More
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