Question

If you need $750,000 to start a venture, reasoning between financing the $750,000 through debt vs equity.
What would be the impact on the balance sheet, income statement, and cash flow statement?

Answer 1

If we if raise $750000 by

Debt Financing

If a firm raises funds of $750000 through debt financing, there is a positive item in the financing section of the cash flow statement as well as an increase in liabilities of $750000 on the balance sheet. Debt financing includes principal, which must be repaid to lenders or bondholders, and interest. While debt does not dilute ownership, interest payments on debt reduce net income and cash flow. This reduction in net income also represents a tax benefit through the lower taxable income. Increasing debt causes leverage ratios such as debt-to-equity and debt-to-total capital to rise. Debt financing often comes with covenants, meaning that a firm must meet certain interest coverage and debt-level requirements. In the event of a company's liquidation, debt holders are senior to equity holders.

If we raise $750000 by

Equity Financing

Equity financing – raising money by selling new shares of stock of amount $750000 it has no impact on a firm's profitability, but it can dilute existing shareholders' holdings because the company's net income is divided among a number of shares issued to raise the amount. When a company raises funds through equity financing, there is a positive item in the cash flows from financing activities section and an increase of common stock at par value on the balance sheet.