Question

From a managerial perspective, what are the advantages and disadvantages of financing obtained from each of the following: equity, debt, and intra-corporate sources?

Answer 1

Equity Financing

The company receives capital by selling stock to the public, which provides shareholders a portion of ownership in the company and, the company returns a dividend to shareholders.

Advantages of Equity Financing

• By using equity financing, there is no need to repay the loan.
• It gives the company independence to direct more money into a growing business.
• The company can sustain a good credit score by utilizing equity financing.

Disadvantages of Equity Financing

• Shareholders will expect a part of profits it will result in a share of profit.
• Company control is also shared with shareholders relative to their equity holding.
• Sharing ownership and having to work with others could head to unusual stress and struggle.

Debt Financing

Debt Financing is financing from international and domestic loans and foreign bonds.

Advantages of Debt Financing

• The lender has no authority in the company.
• The management can make decisions at their discretion and no need to ask lenders' approval.
• The company can get a tax shield from the interest portion.
• Management can efficiently determine how much principal and interest will pay back each month.

Disadvantages of Debt Financing

• The company needs to have a good credit score to obtain debt financing.
• Financial control is required.
• Shareholders will feel a high risk if a company is dependent more on debt financing.
• Companies need to agree with the terms and conditions of lenders.

Intra-corporate Financing

The company obtains funding for international operations from within its network of subsidiaries and associates.

Intracorporate financing refers to funds from sources inside the company. These sources include equity, loans, and trade credits.

Advantages of Intra-corporate Financing

• It allows an organization to sustain full control.
• It decreases the overall cost of most projects.
• It restricts outside influences on the company.
• There is no further equity to be announced.
• It Saves bank transaction costs.

Disadvantages of Intra-corporate Financing

• It may hurt the company operating budget.
• It may have fewer tax benefits for the company.
• It requires spending control.
• It can take more time to finish projects.

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