Question

Advise Linkitin Pty Ltd on sources of finance

Linkitin Pty Ltd is a new company with an interesting new service that shows great potential. However, the company needs more long-term finance to grow. Its founder, Chodar, is an expert in his area but he knows very little about business. He is currently the only shareholder of the company and has no family or friends that could provide further financing.

You have been asked to explain sources of long-term financing. You have decided to keep it simple and explain the difference between debt and equity and provide an example of each that would apply to a start-up business such as Linkitin.

Answer 1

SOLUTION - Sources of long term financing of business aere  of debts and equity .  Government grants may be an option to finance certain aspects of business .

Debts are borrowings from outsiders may be friends and relatives , public , banks and commercial finance companies etc .

Equity is part of capital invested by sharehoders . Company issues shares to public and raise capital .

DIFFERENCE BETWEEN EQUITY AND DEBTS

Equity is part of capital hence owners money hence income shall be distributed among shareholders . However there is no fixed liability to pay in case there are insufficient profit or loss . The other benefit is equity being owners money is not to be refunded during life time of company . Profit distribution to shareholders is not a deductable expense for income tax purpose .Thus the main advantage no fixed responsibility to pay dividends and paying back of equity but disadvantage complete profit shall be distribued and such distribution shall not be considered as expense hence no relif in income tax .

Debts are loans having fixed interest liability to pay and reposibility to repay the debts during life time only . The interst paid is tax deductible . So the advantage is paying fixed amount of interest and being considered as debts tax benefits and disadvantages are fixed liability to pay .

Examples of equity

• Common Stock.
• Preferred Stock.
• Paid-in Capital in Excess of Par Value.
• Paid-in Capital from Treasury Stock.
• Retained Earnings.
• Accumulated Other Comprehensive Income

Examples of debts

• Bonds
• Debentures
• Leases
• Loanns from bank and commercial leanders
• Governments programs

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