...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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...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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...global spirits companies. What started as a young salesperson idea to sell top grade whiskey in sealed glass bottles has now flourished in to a company with sales of $3.8 billion dollars (BROWN-FORMAN Our Company, 2012.) The following will contain information on the organizations most recent financial statements. Corporate debt Securities A debt security in finance is when a lender such as a bank or corporation lends money to an interested party looking for financial gain in the form of bonds. Debt securities are interesting because they serve the purpose of creditors who loan money to a borrower and accrue interest to sell them. They have value. For example, a creditor creates a binding agreement with a borrower listing all the financial terms for loan payment in the form of a contract in which will carry value because of the accrued interest attached to it. So with the accrued interest attached, these contracts carry value and now can be sold or even traded; hence debt security (secure debt). This is how creditors secure debt. According to Introduction to Financial Statements reading material, a debt security is also called bonds. Bonds are debt instruments to gain capital. In the Brown-Forman company,...
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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 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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...Issuing Equity versus borrowing at a rate of $12.50 Info Systems Technology is a manufacturing company which manufactures microprocessor chips for the use of appliances and other applications. Info Systems Technology needs to raise $500 million in order to build a new production facility. Info Systems Technology’s share price is $13.50. We are assuming that IST issues equity, the share price remains constant. We will take two different approaches in deciding if IST should borrow the $500 million or chose equity based on different share prices. Assuming the shares cost $12.50 If we decide to borrow this will have a net cost of about $20 million, we arrive by $20 million by dividing $20/100 which is equal to twenty cents per share. If we decide to sell the share benefit would be $37 million. This figure is derived from diving 500 by current share price, which is $13.50. 500/13.50 = $37 million shares. We will now have to calculate how much it is per share if we are to issue equity. [12.50(100+500)]/[100+(500/13.50)] = $12.77 $12.77-$12.50 $0.27 After calculations we can see that if we borrow we will end up with $0.20 cents per share versus if we were to issue equity we will end up with $0.27 per share. With these findings managers should chose to issue equity. Issuing Equity versus borrowing at a rate of $14.50 With the same assumptions Info Systems Technology, is still trying to maximize the long term share price of the firm, once it knows it’s true value...
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...wireless operations became part of Verizon Wireless; creating the nation's largest wireless company. Verizon today is a global leader in delivering broadband and other wireless and wireline communications services to mass market, business, government and wholesale customers. 1) How are Verizon’s debt securities reported? A. Definition of debt security B. How is utilized on their financial statement? C. What did their financial statement reveal? 2) How are Verizon’s stock investments reported on their financial statement? A. Definition of stock investment B. How is it utilized on their financial statement C. What did their statements reveal about their stock investments 3) Why does Verizon invest in stocks and debt securities? A. To fund network expansion and modernization, repay external financing, pay dividends, repurchase Verizon common stock from time to time and invest in new businesses. 4) What are Verizon’s risks and rewards of equity versus debt securities? A. Verizon’s relative risks of equity versus debt securities: 1. Example 2. Example B. Verizon’s rewards of equity versus debt securities: 1. Example 2. Example Conclusion: Verizon is having difficulty matching its performance levels...
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...23780 December 5, 2010 Case Study 3 1. If IRE would like to maximize its total market value, should it issue debt or equity to pay for the rental property? Briefly explain. Levered or unlevered, if IRE purchase the large rental property, their new capital structure will still be below the optimal capital structure amount of 45% debt. However, issuing debt to purchase the large rental property will net IRE the higher market value. VL = $1,855,759,259 - VU = $1,768,259,259 2. How does the market value balance sheet of IRE look like before the firm makes the announcement on the rental project? Explain and construct the market value balance sheet. Before IRE takes on any debt, the market value of their assets is entirely equal to the market value of their equity. Indiana Real Estate Inc. Market Value Balance Sheet - Before Land Purchase Assets $1,359,000,000 Equity $1,359,000,000 Total assets $1,359,000,000 Total Debt & Equity $1,359,000,000 3. What is the present value of the rental project, assuming that IRE issues equity to finance it? NPV of Project | $ 159,259,259 | 4. How will IRE’s market value balance sheet look like after the firm makes announcement on the rental project which will be financed by equity? Explain and construct the market value balance sheet. The market value of IRE’s equity is equal to the market price of their stock outstanding and the net present value of the project. Indiana Real...
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...wireless operations became part of Verizon Wireless; creating the nation's largest wireless company. Verizon today is a global leader in delivering broadband and other wireless and wireline communications services to mass market, business, government and wholesale customers. 1) How are Verizon’s debt securities reported? A. Definition of debt security B. How is utilized on their financial statement? C. What did their financial statement reveal? 2) How are Verizon’s stock investments reported on their financial statement? A. Definition of stock investment B. How is it utilized on their financial statement C. What did their statements reveal about their stock investments 3) Why does Verizon invest in stocks and debt securities? A. To fund network expansion and modernization, repay external financing, pay dividends, repurchase Verizon common stock from time to time and invest in new businesses. 4) What are Verizon’s risks and rewards of equity versus debt securities? A. Verizon’s relative risks of equity versus debt securities: 1. Example 2. Example B. Verizon’s rewards of equity versus debt securities: 1. Example 2. Example Conclusion: Verizon is having difficulty matching its...
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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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...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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...Anindita Pal (Section 6) and Raghav Sharma (Section 5) Please comment critically on the following: 1- Do you agree with the way the company computes its weighted average cost of capital. Why or why not? Be specific? How would you compute the WACC? Use RF= 8.08%, Beta of equity for Pioneer = 0.8 and RM-RF = 7% I disagree with the way the company computes it’s WACC. They are assuming a cost of equity based on the current earnings yield on the stock to raise new equity. This does not make sense as the share price can fluctuate and vary based on multiple market factors. Also the market risk premium to raise new capital is not factored in here. So we should use the Capital Asset Pricing Model to calculate cost of equity. Cost of equity = Rf + Beta * Market Risk Premium = 8.08% + 0.8* 7% = 13.68% Since the company has instituted a policy to maintain a 50-50 equity-debt, % of debt and % equity = 0.5 Since the company has policies to maintain appropriate financial leverage, its fair to assume they will sustain their A rating. Therefore, Tax deducted cost of debt is 7.9%. WACC is given by: 0.5* 13.68% + 0.5*7.9% = 10.79% 2- Should Pioneer use a single cutoff versus multiple cutoffs for discount rates if beta of exploration division is 1.07, beta of refining division is 0.95, and beta of transportation division is 0.52? Why? I think that Pioneer should evaluate each division with its own beta and calculate a separate hurdle rate for investments...
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