if your organization had two projects one costing $100,000 and one costing 1 million what type...

if your organization had two projects one costing $100,000 and one costing 1 million what type of financing might be applied? what are the trade offs with the use of debt?

Expert Solution

The types of financing that can be applied is Equity, preference and use of debt.

It depends upon many factors based on which the types of financing needs to be chosen.

1. For a 100000 it is better to use the equity capital alone. Because it is easy to raise, as the amount is small, the same can be obtained from retained earnings or raising of capital and equity shares do not create any obligation to pay a fixed rate of dividend. Hence is project can be run without the burden of any fixed payments.

2. $1 million.
For a large project, a combination of Debt + Equity needs to chosen because debt is the least costly source of long term Finance. There is a taxation benefit. There is a trade-off benefit for such a large project and trading on equity benefit.

It provides flexibility in the capital structure.

Trade-off benefit means using an appropriate proportion of debt and equity to deliver- balancing of cost and benefits, for the optimum cost of capital.

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