Question

In 200 words or more:

Differentiate between debt and equity financing?

What are some of the various sources of debt and equity financing?

Answer 1

Financing is key requirement to for any firm to run and the main source of it is either debt or equity or both. The equity financing is the owner capital which remain with the firm for life of the firm and whereas the borrowed capital is the outsider capital borrowed by the firm. who are the creditor for the firm and their interest is fixed return from the firm. The equity financing has the return after the all payment made to the outsider. the residual income is for the equity shareholders. Every company make its optimal capital structure by perportioning the equity and debt in such way that the wealth and profit can be maximized for the equity by using the debt financing. it is called using the financial leverage.There is obligation to return the interest of the debt fund whereas for the equity fund there is no obligation for return to owner. The return to debt fund is called interest and for equity fund the return is dividend.. when the firm usually performed well debt financing is used to increased the return of the equity shareholders. For the firm with risk and variable income usually prefer equity financing and for stable income debt financing is used.

the various sources of debt and equity financing

The equity financing is raised from issuing shares in the market and or private placements.

the debt is obtained from the issuing debentures bonds, long term loan form the financial institutions etc.