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Question 2: Is equity financing a reasonable alternative to borrowing? Explain in details please

Question 2: Is equity financing a reasonable alternative to borrowing? Explain in details please

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Expert Solution

What is better option, an equity financing or debt financing?

Advantages of Equity Financing

  • No fixed obligation. In debt there is fixed obligation pertaining to the interest payments and principle. In equity there is no fixd obligation. Co may give dividends to the equity shareholders or may not based on the position of the company. Hence there is no fixed obligation
  • As obligation kicks in there is a risk of liquidation by the the debt holders. Any default in payments, debt holders may take the company to court and may liquidate the company.
  • Less Covenants. Mostly any debt comes with certain covenants. Which may be financial covenant or other covenant. This puts a restriction on the company to function freely.

Disadvantages of Equity Financing

  • Loss of stake in the company. Any further equity financing dilutes the holding of the existing shareholders.
  • Lower benefits of financial leverage. Company does not enjoy financial leverage thereby limiting the upside for existing shareholders.

jeff jeffy answered 1 year ago
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