...Debt Financing Ayivi Koutodjo Business 530 Abiola Fapetu Liberty University Debt financing decision is not a process of couple hours of meeting. It required thorough scrutiny and an effective brainstorming. Managers are, most of time, facing huge challenges in meeting the company’s cash flow target. The task on hand is to find solutions of the possible organization’s incoming shortage of cash, more precisely how to raise and maintain cash in the company six months from now until the next two years, when the company will lunch his lucrative product. Many possibilities will be analyzed and the best one will be presented to the board of directors. Debt financing is an on-going process that company uses to achieve their objectives. It is one of the chief financial officer (CFO) duties. The CFO has multitude of choices to choose from when I comes down to raise cash. He could decide to retain earnings, to sell bonds, to sell stocks, or to obtain a loan. The CFO has to choose the one that add value to the shareholders wealth. To be successful in this task the CFO must consider the current economy condition and the current organization’s standing and objectives. Furthermore, the CFO must remain trustworthy and must not...
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...THE ADVANTAGE OF DEBT FINANCING Interest on debts paid by a corporation is deductible as an ordinary and necessary expense of the corporation . The general rule governing the interest taxation can be found in 26 U.S. Code § 163 : “There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness.” In other words, if the payments are categorized as interest, they will be deducted from the taxable earnings and there will result the also-called “the tax benefit of debt”. A. Constructive dividends. The only problem concerning this advantage is that in some cases IRS (Internal Revenue Service) can consider this just a scheme to avoid double taxation, and characterize these payments as “constructive dividends”. As a result, the deduction benefit is lost and the corporation must pay taxes on the amounts of money that are considered interest. “When a corporation confers an economic benefit upon a shareholder, in his capacity as such, without an expectation of reimbursement, that economic benefit becomes a constructive dividend, taxable to the respective shareholder. This benefit is taxable to the shareholder whether or not the corporation intended to confer a benefit upon him” . The term “constructive dividends” is usually used to describe that situation when the corporations pays the stockholders-employees “salaries”, for the services they rendered to the business entity. This is just another method to avoid double taxation: the salaries...
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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 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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...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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... Determinants of short-term debt financing Richard H. Fosberg William Paterson University ABSTRACT In this study, it is shown that both theories put forward to explain the amount of shortterm debt financing that a firm employs have validity. The matching principle correctly predicts that the amount of short-term debt financing that a firm uses is directly related to the quantity of the firm’s current assets. Additionally, other factors that have been shown to affect the levels of long-term debt financing that a firm employs are also shown to affect the amount of short-term debt financing that a firm uses. Specifically, the amount of firm short-term debt financing is shown to be inversely related to the amount of the firm’s non-debt tax shields, growth opportunities, product uniqueness and firm size. Additionally, short-term debt financing was found to be directly related to the quantity of tangible assets the firm owns. Keywords: Debt, Capital Structure, Matching Principle, Collateral, Financing Determinants of short-term, Page 1 111008 – Research in Business and Economics Journal INTRODUCTION The matching principle of finance is the standard theory used to explain the amount of short-term debt financing and other current liabilities that a firm has on its balance sheet. Briefly, the theory states that firms should finance their short-term assets with short-term liabilities (Guin (2011)). This implies that the amount of short-term debt financing that a firm uses depends on...
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...Determinants of firm Short term Financing behavior: Evidence from Listed firms in Pakistan Muhammad Shahbaz 0132-BH-BAF-10 Faizan Saeed 1091-BH-BAF-10 Session: 2010---2014 Department Of Economics GC University, Lahore Determinants of firm short term financing behavior:Evidence of Listed firms in Pakistan | Submitted to GC University, Lahore in Partial fulfillment to the requirement For the award of degree of BS (Hons) In Business Accounting and Finance By Muhammad Shahbaz Faizan Saeed Roll No | 0132 | BH | BAF | 10 | Roll No | 1091 | BH | BAF | 10 | Session: 2010-2014 Department Of Economics GC University, Lahore RESEARCH COMPLETION CERTIFICATE It is certified that the research contained in this dissertation titled “Determinants of firm short term Financing behavior: Evidence from Listed Firms in Pakistan”, has been carried out and completed by Mr. Muhammad Shahbaz (Roll No 0132-BH-BAF-10) and Mr. Faizan Saeed (Roll No 1091-BH-BAF-10) under my guidance and supervision. The quantum and the quality of the work, contained in this dissertation, are adequate for the award of Degree of BS (Hons.) in Business Accounting and Finance Date: ______________________ ___________________ Mr. Nisar Ahmed Supervisor Department of Economics ...
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...Meeting the Challenges of Stakeholder Engagement and Communication: Lessons From Teacher Incentive Fund Grantees The Harvesting Project Julia E. Koppich J. Koppich & Associates Meeting the Challenges of Stakeholder Engagement and Communication: Lessons From Teacher Incentive Fund Grantees As of August 2010, a total of 33 states, school districts, charter school coalitions, and other education organizations¹ had received Teacher Incentive Funds (TIF) to redesign compensation programs for teachers and principals. The U.S. Department of Education named a new cohort of TIF grantees on September 23, 2010. TIF grantees have faced a number of challenges as they have worked to design and implement new educator pay programs. Among the most demanding challenges has been developing a targeted set of metrics around available and manageable data. Grantees use these metrics to measure teacher or principal effectiveness and assign pay. Recently, grantees have made it a priority to sustain operation programs once their federal funding expires. TIF grantees have also found, often belatedly and unexpectedly, that effective stakeholder engagement and communication are challenging and essential to the success of their pay programs. Stakeholder engagement helps to create buy-in and initial acceptance of the TIF plan. It allows different voices and perspectives to be heard and recognized as new approaches to compensation develop. Communication provides the synergy to broaden buy-in and...
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...To Lease or Purchase? May 2, 2011 ACC/400 Peter Ioveno To Lease or Purchase? It is important to know when it is a good time to purchase items or lease items, as an individual and in the business world. If you purchase an item at the wrong time, it could easily put a company as risk for financial hard times. The following will detail some important factors to review when purchasing or leasing is an option. The Differences between Leasing and Purchasing Both leasing and purchasing has its pros and it cons. The trick is to figure out which would be better for a company’s current financial status. Leasing allows a lessee to avoid large down payments, keep updated materials, lower lease payments due to shared tax advantages, and the property that is being leased does not show as an asset or liability. These are all positive factors if your company is a smaller company and does not have the cash to purchase the material or only needs the material for a limited time. Next are a few pros of purchasing through a capital lease. Leasing payments on an operational lease might be higher than those payments on a capital lease due to interest rates and since the company does not own the property, it must not be abused or used to harshly because it will be returned to the lessor. A capital lease gives you tax breaks such as deprecation, while operational leasing does not. As stated above, operational leases (rental agreements) and capital leases (purchasing leases) both have...
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...One of the most important form of long term finance nowadays is Lease financing * Advantages of Lease finance over purchase of asset. * Huge capital investment on asset can be eliminated buy lease purchasing of assets. * Risk of depreciation and obsolescence doesn’t affect to the lessee. * Leasing is quickest and easiest method of financing of capital * The periodic lease rents paid by the lessee are tax deductible expenditure. * Leasing increase the borrowing power of the company as its debt equity ratio will be unaffected by lease purchase. * Bad investments can be avoided by lease purchasing. * Lessee can lease purchase and pay for asset only for the time he needs it. * Lease financing is not affected by inflation. Even if the costs go up over some years, you still pay the same lease rent as agreement. * In case of car lease finance or auto lease finance, one can enjoy using latest or high cost cars without buying it for a desired period of time. Disadvantages of lease financing: * Lease financing is a favored means of financing long term capital. However it is having following disadvantages. * Lessee has an obligation to continue making lease rent payments even if he is not economically using the asset because of decline in his business. * Even though lessee is not the owner, he is still responsible for repair and maintaining the asset as specified by the contract. You need...
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...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 vs. Equity Financing ACC 400 May 1st, 2012 Debt vs. Equity financing Many businesses find it necessary to expand. The question is how? Business owners look to the advantages of debt compared to equity. These two categories are the main sources of capital for businesses, which there is nothing more important than raising capital. Finding the right balance between debt and equity financing means weighing the benefits of each and involves accounting, investing, banking and sometimes even some legal assistance. Debt Financing Debt financing is defined as taking on a form of loan/loans that must be repaid over time, often times with interest. In order to use debt financing as an option, businesses can choose to borrow from government agencies or banks for short term; which is usually under a year or long term loan over 12 months. Debt financing has it’s benefits to business owners during tax season because the interest paid on loans is deductible. However, the disadvantage is obviously the risk involved with taking out a loan in general, because there is a burden of that debt and failure to repay that debt with irregular cash flow available. For example: Being a student in college I had to choose if I wanted to invest in my future and how financially I was going to pay my way through school. So I chose to take out loans and pay the interest and loan off while in school, I not only took a risk but I did it to expand and grow. Second example...
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...Analysis to Making Financing Decisions in Practice: Two Case Examples in Australia George W. Kester, Washington and Lee University Jamie Mckellar, Thiess Pty Ltd Jeremiah Mulcahy, BHP Billiton Ltd This paper describes the use of the FRICTO analytical framework for comparing financing alternatives and making financing decisions. Two case examples in Australia are presented to illustrate how two former investment bankers have used the FRICTO framework to help clients make financing decisions that take into account flexibility, risk, income, control, timing and other considerations. They have found the analytical framework prompts decision-makers to consider other important issues beyond risk and the effect on earnings per share that reflect a company’s unique and often complicated circumstances. INTRODUCTION Modigliani and Miller (1958) advanced the proposition that based upon several simplifying assumptions, capital structure has no effect on the value of a firm. However, recognizing the impact of taxes, bankruptcy, agency costs, and asymmetric information, capital structure theory has evolved to acknowledge that the use of debt does affect the value of a firm. Modern theories of capital structure can be classified into two categories: “static tradeoff models” and the “pecking order hypothesis.” Static tradeoff models imply an optimal debtequity mix which is determined by a tradeoff between the benefits and costs of debt (i.e., balancing the tax advantages of debt against the risk...
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