Define/describe the following sources of funding: debt capital, equity capital. Provide a short list of each...

Define/describe the following sources of funding: debt capital, equity capital. Provide a short list of each type. Describe advantages and disadvantages/limitations of each category of capital.

Expert Solution

Debt Capital refers to capital raised by a company to take out loan.

Normally repaid at future date.

Subscribers of debt Capital are Creditors.

Advantages:-

Helps companies for constructing their capital.
Helps keep profit with in a company.

Increases returns for company owners in securing tax savings.

Disadantages:-

Repay with interest.
Businesses suffer from difficulties in repaying the money.
Penalties for companies fail to pay debt.

Affects credit rating of companies.

Equity capital:-

Capital that is invested.
Not repaid to the investors.
Value is computed.by estimating current market.value of a company.

Capital is free of debt.

Advantages:-

No need of regular payment to investors.
Can use more incoming cash flows.
More profit.
New investments with more ownerships.

Save loan interests.

Disadantages:-

No guarantee for Equity investors.
Legal restrictions.
Greater overall cost.
Stock holders exposed to Risks because of last in line payment.

When the company goes bankruptcy.

Rahul Sunny answered 2 years ago

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