...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 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 ACC/400 May 14, 2012 Debt versus Equity Financing Debt versus equity financing is a critical element in the process of managing a business and also the most challenging decision facing managers who require capital to fund their business operations (Schroeder, Clark, & Cathey, 2005). Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages. This paper will compare and contrast lease versus purchase options, examine debt and equity financing, provide examples for each source of financing, and identify which alternative capital structure is more advantageous. Lease vs. Purchase Options: Compare and Contrast In business the decision to lease or purchase is a critical element of strategic management. Equally important is the way in which the asset will be used. Operating leases are most often used by organizations looking for fixed payments with no long-term risk, and a limited useful life of the asset. Capital leases are more aligned with the features of a conventional purchase. Purchasing often requires a higher monetary expenditure at the start, in addition to acquiring the financing to purchase through a lender. Leasing usually requires a lesser amount of cash down, and the monthly payments are often smaller. Additionally, leasing offers tax benefits because the full lease payment can be immediately deducted, whereas purchasing only allows the interest...
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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 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 Vs. Equity Financing Paper Scarlett Halifax Accounting 400 March 25, 2013 Mrs. Marissa Portugal The last five weeks, we have learned many different principles in accounting. One of the most important principles we have learned in that of the different types of financing that are available to corporations. This paper will look at leasing versus purchasing and Debt versus equity financing. To understand and make the right decisions in financing, it is wise to look at your company’s internal statements and needs. Leasing is defined as an effective way for you to manage the cost of replacing business equipment and technology while maintaining your cash flow. Leasing is a good option is you need to do something immediate, but do not have immediate cash to outright purchase. There are also several benefits to leasing such as tax benefit and flexible interest rates. However, purchasing may be a better option for your company if you plan on keeping the equipment for the duration of its lifecycle. What is Debt Financing Debt Financing is defined as financing which is money that a business borrows to run the company. One of the most important things to consider is the interest rate amount at the beginning of financing the loan, but most to their determent this is a factor that a lot of companies seem to fail to investigate or research. A couple of debt financing examples are; short term and long term. A company’s operating loans...
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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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...value at a specific point in time The Balance Sheet Identity is: Assets ≡ Liabilities + Stockholder’s Equity 2-2 U.S. Composite Corporation Balance Sheet 2-3 Alphabet Inc. - Assets Assets As of December 31, 2014 As of December 31, 2015 Current assets: Cash and cash equivalents Marketable securities Total cash, cash equivalents, and marketable securities Accounts receivable Receivable under reverse repurchase agreements Income taxes receivable, net Prepaid revenue share, expenses and other assets Total current assets Prepaid revenue share, expenses and other assets, non-current Non-marketable investments Deferred income taxes Property and equipment, net Intangible assets, net Goodwill Total assets $ 18,347 46,048 $ 16,549 56,517 64,395 9,383 11,556 875 450 591 1,903 3,412 3,139 78,656 90,114 3,187 $ 73,066 3,181 3,079 176 23,883 4,607 15,599 129,187 5,183 251 29,016 3,847 15,869 147,461 $ 2-4 Alphabet Inc. –Liabilities and shareholders’ equity As of December 31, 2014 Current liabilities: Accounts payable Short-term debt Accrued compensation and benefits Accrued expenses and other current liabilities Accrued revenue share Securities lending payable Deferred revenue Income taxes payable, net Total current liabilities Long-term debt Deferred revenue, non-current Income...
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...Frederick Thull Comparing and Contrasting Lease verses Purchase Options In order for one to explain the difference between leases verses purchase option one would need to explain both options. One would explain what is debt financing, and provide two examples. Also, one would need to explain what equity financing is as well as giving two examples and last which alternative capital structure is more advantageous and why. If one decided that they do not wanted to take on investors and wanted total control of the business yourself, one may want to pursue debt financing in order to start up a business. One would tap your own sources of funds first by using personal loans, home equity, and even credit cards. A business loan is another option. Debt financing is when a company borrows money that must be repaid but with interest. This will not affect the ownership of the company. Two examples of such would be Issued Bonds and Line of credit. With a line of credit, this is a bank loan where a business can draw out funds whenever money is needed. In Issue Bonds the business can issue bonds as for of debt financing these bonds are marketable securities. Debt financing allows one to have control of your own destiny regarding the business. If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. That is some of the advantages. The disadvantages...
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...Based on the information provided, we estimate Flash’s share of the market at 15% in 2007 which rapidly declines to an estimated 2% by 2013. This underscores Flash Memory’s need to accelerate top line growth to remain a significant player in the market. The forecast balance sheet (Exhibit 2) shows the account balances for Flash Memory assuming they do not invest in the new product line. The financing requirements in 2010, 2011 and 2012 are $14,433, $17,120 and $13,228 respectively. This increase in debt levels has changed the capital structure of the firm over time, increasing debt as a percentage of capital from 28% in 2007 to as high as 39% by 2011 (vs. a target of 18%). We calculated WACC for both scenarios - funding by increasing notes payable or by the issuance of stock. For the notes funding, we assumed a 9.25% cost of debt (loan rate of 3.25% prime + 6%) and a forward looking 2010-2012 average forecast debt/value ratio of 41%, resulting in a WACC of 10.11% (Exhibit 3). For the equity funding, we assumed a 7.25% cost of debt (loan rate of 3.25% prime + 4%) and the target debt-to-capital ratio of 18%, resulting in a WACC of 11.67% (Exhibit 4). The proposed investment would require a substantial cash...
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...Business Financing and the Capital Structure 1 Business Financing and Capital Structure Clifton Williams Strayer University Professor Henderson Fin 100 May 24, 2014 Business have to make many financial decision that a direct impact on operations and the ability to successfully compete in the marketplace. I will assume that I am a financial advisor to a business. I will give advice that I would give to the client for raising business capital using both debt and equity options in today’s economy. I will give advantages and disadvantages of each option. I will summarize the advice that I will give the client on selecting an investment banker to assist the business in raising capital. I will discuss the historical relationships between risk and return for common stock versus corporate bonds. I will explain the manner in which diversification helps in risk reduction in portfolio. I will support my response with actual data and concept learn from class. As financial advisor to a business I will give my client advice on raising business capital using debt and equity capital with their advantages and disadvantages. As my clients advisor I would describe the two most common types of financing which are debt and equity capital. I would tell them the difference between the two and the advantage and disadvantage of the two. Debt capital is an agreement contract between lenders and companies trying to start or grow its organizations. All debt issued have...
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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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...agreed the price was fair, but they were faced with a situation- how to raise the capital needed to purchase Harmonic Hearing. Wren gave Burns three months to complete the transaction, creating a deadline of January 2011. To further complicate the situation, Harmonic was in the midst of developing a cutting-edge hearing aid that promised strong sales. To get the product to market quickly, Burns and Irvine needed to find additional capital to finance the R&D, manufacturing, and marketing of the new hearing aid. They could fund this additional cost by raising extra capital, or use internal cash instead (which could slow go-to-market time and dangerously deplete cash reserves). Burns and Irvine were fortune to have two alternatives for financing. The first...
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...characteristics are considered by an MNC when it establishes its capital structure. l l An MNC finances its operations by using a mixture of fixed interest borrowing and equity financing that can minimize the overall cost of capital (the weighted average of its interest rate and dividend payments). By minimizing the cost of capital used to finance a given size and risk of operations, financial managers can maximize the value of the company and therefore maximize shareholder wealth. 25 26 MULTINATIONAL COST OF CAPITAL AND CAPITAL STRUCTURE BACKGROUND ON COST OF CAPITAL Apart from working capital, a firm’s capital consists of equity (retained earnings and funds obtained by issuing shares) and debt (borrowed funds). With these funds a firm invests in a portfolio of projects, each project potentially offering different risks and different returns. The interest rate that the firm applies or charges to these projects (the cost of using the firm’s capital) will therefore vary according to the project’s particular risk. Profitable investment in this context is where the firm invests in projects that achieve returns greater than that required by their risk. A project that achieves a 20% return from investing in car parks (safe) is arguably a better performer than a project achieving a 25% return from financing a musical show (risky) in that many of the musical shows will fail and most of the investments in car parks will succeed – it is only a higher expected return. For convenience...
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