Question

Two common forms of financing include debt and equity. Explain these financing options by defining them in your own words, discussing when each would be most appropriate, and providing an example that illustrates when each method might be preferred over the other. In replies to peers, discuss whether you support the definitions and examples provided using the topic materials

Answer 1

DEBT FINANCING

Debt financing means borrowing a fixed amount from a lender, which is then with decided interest paid back. Debt financing is when a firm raises money by selling bonds, bills in return for lending the money.with debt financing the company has to repay the debt.when it comes to financing a company, the cost is the measurable cost of obtaining capital.When it comes to the debt financing, it is the Interest expense a company pays on the debt.

Example:In smaller scale,a shopkeeper taking business loans for expanding his business,by keeping his stock as a collateral security.In larger scale Apple Inc; Raising funds for expansion by issuing 10% Bonds to the open public.

EQUITY FINANCING

Equity financing means when the sale of a percentage of the business to an investor to get the capital.Equity Financing is when you raise money for the business by giving a percentage share of ownership in the company. The equity investors in return,receive dividend when the company is making profits. If the company makes a loss,then no dividend is declared or the equity investors do not get paid. However, the relationship with equity investors exists in perpetuity. Unlike debt, once the initial amount is recouped, they don't go away. They will generally keep their ownership share or sell to another investor.

So in short Equity financing consists in giving an investor a portion of your company's stocks in exchange for money.

Example:Apple Inc is planning to expand it's area of operation by Issuing Shares/Stocks to General public.

Choosing Appropriate Financing Methods(with Example)

Following Factors should be considered before choosing a financing method.

Criteria	Debt Financing	Equity Financing	Preference
Ownership	No Impact	Ownership is diluted	Debt is preferable
Tax Impact	intrest is tax deductible	dividend is not tax deductible	Debt financing preferable
Period	Short Term	Long term	Equity financing is preferable
Risk	Intrest should be paid irrespective of profit or loss	dividend is payble only if there is profit	Equity Financing is preferable

Example:If a company wants to raise fund for a Short term period ,it's better to choose debt financing because it's not a good idea to dilute the ownership for a short term needs and company can utilise intrest deduction while paying taxes.

So on the other hand,if a company wants to raise a larger amount of money for a long term period,it can choose equity financing because dividend has to be paid only when the company enters profit zone,and if loss no dividend has to be paid.if the equity investors are experts in our industry,they can greatly increase the chances of success too.