...Debt versus Equity Financing Brenda L. Rochelle ACC/400 November 7, 2011 Carl Mir Debt versus Equity Financing Introduction In this paper, the author will attempt to compare and contrast lease versus purchase options by providing definitions of debt financing and equity financing and providing examples of each. Additionally, the author will attempt to address which alternative capital structure is more advantageous and why. Business owners must decide whether to purchase outright, finance purchases, or through a long-term lease. Full rights of ownership are realized when purchasing outright. Financed purchases lessen control of the asset by the buyer. Restrictions may be placed on the buyer’s right to sell by the lien holder in an installment purchase. In a long-term lease, the lessee lacks the right to sell, except for any purchase options available. An alternative is short-term leasing. This alternative frees the lessee of most risks of ownership, specifically obsolescence and maintenance. Additionally, the rental rate reflects these advantages. Choosing between outright purchase, financed purchase, long-term lease, and short-term leasing, causes management to face operational considerations such as maintenance, obsolescence, and the degree of control. Decisions involving financial considerations are necessary when ownership is selected. Debt Financing Debt financing is borrowed money a company receives in return for a promise to repay the loan. This...
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...Debt Versus Equity Financing Debt versus Equity Financing is an interesting subject in that it is one of the most important decisions a company will face when choosing to finance a new project. Debt Financing is a more traditional approach. In Debt Financing a company seeks financing from a financial institution or a private debt through a group of investors in the form of a loan. The loan will have set terms such as interest, repayment schedule, and payment amounts. The company will be obligated to make payments on the loan regardless of the amount of revenue coming in. The loan also often has some form of collateral to guarantee the loan. Debt Financing has the advantage of being a fast way to obtain money to finance a project. Another advantage would be the fact that the costs of the loan are fixed they do not change unless renegotiated. Equity Financing is the securing of financing through the issuance of stock or an equity loan both of which give a portion of ownership to the lender. Stock is issued to investors which gives the investor part ownership of the company. This is a much greater risk to the investor purchasing the stock. If the company does fail then the stockholders lose their investment. Equity loans are based on the value of the company’s assets. Equity loans are also common place in the private world in the form of home equity loans. This is where money is borrowed against the value of the borrowers’ personal home. Equity must exist in the item being brought...
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...Debt Versus Equity Financing ACC400/University of Phoenix June 13, 2011 Debt Versus Equity Financing In the accounting industry financing is an important concept. Many companies would not be operable without acquiring some for of financing options. Although there are many types of financing, the two that will be discussed in this paper are debt financing and equity financing. Also this paper will give two examples of each type of financing and discuss which option will be the best choice for the company that will utilize them. Debt Financing Many businesses use debt financing which is money that a business borrows to run the company. The interest rate amount at the beginning of financing the loan is the most important fact to consider, however this is a factor that some companies fail to investigate or research. There are two categories of debt financing; short term and long term. Operating loans are short term debt financing because the repayment that is scheduled if for a period of less than one year. An example of short term debt financing is a line of credit. Long term debt financing are for loans that are for a period of more than one year or the life of the asset. Some examples of assets that a business would purchase with long term financing are machinery, buildings and property. (Ward. 2009) Equity Financing Whereas debt financing is used for operation purposes raising capital by selling stock to various investors is the objective of equity financing...
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...Debt and Equity Financing Paper Organizations funding money in the form of capital for their business can be tedious especially if the risk involved is not properly analyzed well. Organizations must be able to identity if the method of funding their capital is going to contribute to the vision and will also provide enough benefits to satisfy investors and lastly if the weighted average cost will generate future income to the business. Organizations fund their business operations through two main sources of capital called debt financing and equity financing. Each in its own way contributes to the finance of the business. Debt Financing Debt financing takes the form of loans that must be repaid over time, usually with interest. With debt financing businesses can borrow money over a short term or long term period. Banks and government agencies, such as the Small Business Administration (SBA) are the main sources of debt financing that businesses can use. The Small Business Administration (SBA) has a loan guarantee program that allows small and minority-owned businesses to borrow money for various business purposes. This organization does not issue loans, but rather guarantees the loans that will be made under its programs by commercial banks and other lenders. Another example of debt financing is the line of credit. This is a bank loan where a business can draw out funds whenever money is needed in the business. These are usually only available to well-established businesses...
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...Debt Versus Equity Financing Paper By Lori Houser ACC 400 Dr Debra Grimm Due September 10, 2012 There are several differences and similarities between leasing versus purchasing. What debt financing is, what equity financing is, and what alternative capital structure is more advantageous will be discussed. Leasing and purchasing can have many differences. Each has their places. Leasing offers 100percent financing, protection against obsolescence, less costly, and can avoid being added to debt on the balance sheet. Leasing allows you to have less money to start out with and not having to put out more money then you may have. Purchasing provides tax benefits, perceived financial advantages. Purchasing also requires having more money at the start. When purchasing you will have to have a bigger down payment then you would need to have if you were to lease. Purchasing may require the monthly payments to be bigger. Though both are different, they can in turn be the same as a company may have the option to purchase later instead of continuing to lease the property. Debt financing is borrowing money from an outside source that will be returned plus the interest agreed upon. Two examples of debt financing are gaining a line of credit from a bank. This gives a company the funds to make purchases. Another example is real estate. The company would need to find a lender that specializes in commercial lending. Equity financing is selling shares of stock in that...
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...The Debt-Equity Trade Off: The Capital Structure Decision Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles n Invest in projects that yield a return greater than the minimum acceptable hurdle rate. • The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt) • Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. n n Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. • The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics. Aswath Damodaran 2 The Agenda n n n n What is debt? What determines the optimal mix of debt and equity for a company? How does altering the mix of debt and equity affect investment analysis and value at a company? What is the right kind of debt for a company? Aswath Damodaran 3 What is debt... n General Rule: Debt generally has the following characteristics: • Commitment to make fixed payments in the future • The fixed payments are tax deductible • Failure to make the payments can lead to either default or loss of control of the firm to the party to whom payments are due...
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...Debt versus Equity Financing Debt versus Equity Financing Client Letter Accounting Associates 1425 Accounting Dr Chicago, IL 68572 April 18, 2015 John Doe, Chief Administrator XYZ Corporation 123 Somewhere St. Anywhere, USA 12345 Dear Mr. Doe: It was good to see you at the community fund raising event last Saturday afternoon. It is an honor to support this event for our community. In our meeting of February 16, you asked for guidance on the best possible approach in financing capital for your new corporation. There are two alternatives in financing, debt financing, which is borrowing from a lender and equity financing, which is selling of stocks to investors. It would be our recommendation as a start-up corporation to utilize both forms of financing to raise your capital while keeping debt financing to the minimum. In reaching this conclusion we considered the advantages and disadvantages, listed below, of debt financing versus equity financing. We reviewed the Internal Revenue Service’s (IRS) approach on this matter and in consideration of code section 385 which is used to determine if the financing is debt or equity. The IRS may re-characterize debt financing to equity financing under this code section based on the circumstances of the financing (Antebi & Krauthamer, 2014). Advantages of Debt Financing | Disadvantages of Debt Financing | Interest paid is a deductible expense | Reduced cash flow due to monthly payment | Shareholders do...
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...Debt Verses Equity Financing Dean Lilyquist ACC/400 September 29, 2014 Rangan Giri Debt vs. Equity Financing The judgment to rent or buy significantly depends upon requirement as well as financial position. For instance, an organization may rent a piece of property or equipment in case the requirement for such will be short-term. A company has leased a business place for recent years while they were buying as well as building their long term office. Additionally, while finishing a building job, in case an additional machine is required, a business may lease the machine for much lower than having to buy. Some companies may just require a particular machine for one task; therefore a purchase is much too costly. Currently, if a business would see where they have required leasing a particular machine many times, the company will roll the lease into a purchase. What is Debt Financing? Debt financing is when a firm raises working capital through by selling bonds, bills, or notes to individuals and institutional investors. This method allow for the individuals or institutions to become the company’s creditors versus that of the traditional financial institution. Debt financing is desirable by many individuals as it is traditionally a safe way of investing and the investment typically carries a guaranteed rate of return in the form of interest on the principal invested. The debt and interest will be repaid on a set schedule according to the terms of the bond,...
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...Debt Versus Equity Financing Paper Ranithia Settles December 16, 2013 ACC 400 Kylene Smith In this reading the following objectives will be discussed, the definition of debt financing, equity financing along examples of each. This reading will also discuss which alternative capital structure is has more advantages and an explanation will be given. Debt Financing Debt financing is defined as the method of financing in which a company receives a loan and gives its promise to repay the loan ( (Entrepreneur.com, 2013). An example of debt financing is secured loans. Secured loans are loans that require collateral of some sort. There are several types of securities such as guarantors, who sign an agreement stating they will guarantee payment of the loan. Equipment provides 60- 65 percent of its valuable as collateral for the loan, and real estate is either commercial or private can be counted for up to 90 percent of its assessed value. Unsecured loans are typically short term as they require payment with six to eighteen months, Intermediate-term loans are to be paid back within three years, and then there are long-term loans that require payment from the cash flow of the business in five years or less. Equity Financing Equity financing is defined as method in which a company issues shares of its stock and receives money in return (Entrepreneur.com, 2013). Depending on how the equity capital is raised it is possible to bow out anywhere from 25-75% of the business. An example...
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...In the table above are financial ratios from four of the leading brands in the industry of wearable tracking devices. Each ratio explains a company’s operating and financial performance. The debt-to-equity ratio determines the financial leverage a company has based off of dividing its total liabilities over the total stockholder’s equity. When a firm’s debt-to-equity ratio is high, that means that the firm has been aggressive in financing its growth with its debt. As we can see from the table above, Fitbit has the highest debt-to-equity ratio. This may be because of the company being young in the market and not a big name brand like Nike (ratio of 9.92), that of which has solidified their brand footprint over the years in the market. Fitbit’s...
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...Debt versus Equity Financing Stacey Nicholas ACC/400 April 9, 2012 Alice Bergmann Debt versus Equity Financing Debt financing versus equity financing, which financing has more advantages over the other financing. Debt vs. equity financing is the most vital decision a manager will face when determining the needed capital to fund his or her business operations. Both types of financing are the main sources of capital that is available to a business. Both types of financing have advantages and disadvantages when a manager or owner is trying to raise capital. Debt Financing Debt financing can either be long-term or short-term and either secured or unsecured. Debt financing is obtained from a bank and will take the form of loans that must be repaid over-time along with an added fee known as interest. This loan will allow a borrower to finance daily operations. Debt financing offers a business an advantage from paying the interest rate on the loan. The advantage is the interest can be used as a deductible at the end of the year. Debt financing has a disadvantage, if a business has irregular cash flow they will have difficulty in making regular payments on their loan. When a business obtains a secure loan, the bank will hold a title for portion of the investment in exchange for cash. The portion the bank holds onto can be used for collateral in the case the loan is not paid by the maturity date. Equity Financing Equity financing is in the form of money obtained through...
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...EQUITY DIVERSIFIED MUTUAL FUNDS V/s DIRECT EQUITY: A comparative study Submitted in Partial Fulfillment for the Degree of Bachelor of Business Studies By Akshat Jain (Roll No. – 08/BBS/7160 Batch: 2008-2011 ) To DEEN DAYAL UPADHYAYA COLLEGE University of Delhi Shivaji Marg, Karampura New Delhi-110015 | | | ACKNOWLEDGEMENT Encouragement motivates a person towards one’s aim while guidance helps one to achieve it. Both encouragement and guidance take one towards success in one’s works. It would be difficult and almost impossible to achieve excellence without the blessings of God above and of elders. I convey my heartfelt affection and accord my deep sense of gratitude to Dr. Deepa Kamra, Faculty Guide for inspiring guidance, constructive criticism, unlimited interest and innovative ideas throughout the pursue of this manuscript. Akshat Jain DECLARATION I Akshat Jain have completed the Summer Training Project titled “EQUITY DIVERSIFIED MUTUAL FUNDS V/S DIRECT EQUITY” under the guidance of Dr. Deepa Kamra in the partial fulfillment of the requirement for the award of degree of Bachelor of Business Studies from Deen Dayal Upadhyaya College, Delhi University. This is an original piece of work & I have neither copied and nor submitted it earlier elsewhere. Akshat Jain Certificate from Internal Guide ...
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...don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed. Equity Disadvantages By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions. If your business takes off, you have to share a portion of your earnings with the equity investor. Over time, distribution of profits to other owners may exceed what you would have repaid on a loan. These are basic terms which are related to Debt to Equity ratio. How to calculate debt/equity ratio Definition The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial...
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...engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest to 17.6% which points to a WACC of 9.45%. If the firm undertook a more substantial amount of debt, the cost of the debt would not continue to be 7.75% so it is beneficial for HPL to keep its debt low. n the balance sheet. The company lacks sufficient amount of cash to fund the investment so it needed to engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest...
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...recapture. c. the weighted average cost of capital. d. private debt placement. e. personal offset. Difficulty level: Easy MM PROPOSITION I b 2. The proposition that the value of the firm is independent of its capital structure is called: a. the capital asset pricing model. b. MM Proposition I. c. MM Proposition II. d. the law of one price. e. the efficient markets hypothesis. Difficulty level: Easy MM PROPOSITION II c 3. The proposition that the cost of equity is a positive linear function of capital structure is called: a. the capital asset pricing model. b. MM Proposition I. c. MM Proposition II. d. the law of one price. e. the efficient markets hypothesis. Difficulty level: Medium INTEREST TAX SHIELD a 4. The tax savings of the firm derived from the deductibility of interest expense is called the: a. interest tax shield. b. depreciable basis. c. financing umbrella. d. current yield. e. tax-loss carryforward savings. Difficulty level: Easy 15-1 UNLEVERED COST OF CAPITAL b 5. The unlevered cost of capital is: a. the cost of capital for a firm with no equity in its capital structure. b. the cost of capital for a firm with no debt in its capital structure. c. the interest tax shield times pretax net income. d. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure. e. equal to the profit margin for a firm with some debt in its capital structure. Difficulty level: Easy WEIGHTED AVERAGE...
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