Question

As you can see, the financing decisions (how does the company buy assets) are all summed up in the balance sheet. In short, the balance sheet shows the results of both debt and equity financing (among other things).

Give a short description of considerations with each financing option (debt vs. equity).

Which would you chose and why?

Answer 1

cost of financing ;

cost of equity exceeds the cost of debt . interest paid on debt is usually tax deductible . payments on debt are required regardless of the profit margins and shareholders are only paid dividends if the business turns a profit . so the risk to lenders is much lower than it is to shareholders.  there is a possibility that the investment will fail to generate adequate returns. due to this risk, most debt financing options carry a lower cost of capital than equity financing .

amount of capital required ;

the decision of choosing between debt and equity depends on the amount of capital required. if the company needs huge capital , then equity financing will be the suitable option .if the business is not looking for huge amount ,debt financing will be most appropriate option .

shared ownership ;

equity capital reflects the ownership while debt capital reflects the obligation. in equity financing the ownership of the company is shared among the investors in the form of shares .so , the investors always have a say in the company .while in debt financing , no ownership is shared .debt financing may enable smooth running of the business as the ownership is not shared and may be a better option than equity

income of the company ;

if the company don't generate sufficient income , it wont be able to pay the interest and principal to the lender and dividends to the investor . company must make sure that it will have sufficient income to meet their financial obligations arising from debt and equity .if the company is not sure about the income flow to the company it can go for private equity as a financing option rather than debt . private equity is the capital investment made into companies that are not publicly traded and do not contain as much risk as debt financing such as failure of repayment of the principal amount .

risk factors ;

both financing sources have risks . if the company is going for debt financing it must make sure that it have sufficient assets to submit as security .if the company have already taken out so many debt , then it may don't have additional assets to submit and if the payments are not made properly in time it may lose these assets and and might be forced into bankruptcy .If a business raises too much equity capital, it risks losing control of the company. equity investors are entitled to vote on certain company matters. if the company sell a large equity stake to one investor or a group of investors, they may try to influence/control over the company with their shared ownership power .

which option would I choose as an entrepreneur ?

both debt financing and equity financing  have pros and cons . if my company have adequate assets to submit for security , and confident about the future income flow to the company i would probably go for debt financing rather than equity . i believe that for the smooth running of the business , control over the business/ownership is very important . if i choose equity financing the ownership will be shared among other people and i believe that it may disrupt the business to some extent .also, cost of financing debt will be less compared to that of the equity .lenders carry lower risk compared to investors as they are entitled for payments regardless of the profit of the company and acquiring funds will be more easier under debt financing . so , if my business need additional funds in a situation of emergency ,the best option would be to go for debt financing .considering these situations i would choose debt financing over equity financing .