Question

4. a. From a business perspective, what is debt and what is equity? What are two key differences between debt and equity? During the covid-19 shutdown is it better for me to have a business financed by debt or by equity? Explain your answer.

b. For a large publicly traded company, please explain how the firm can get equity financing (one method) and one way that the firm can get debt financing.

Answer 1

a) From a business standpoint debt is where you are required to make a periodic interest payment and if you do not make that payment the bankruptcy situation might arise and equity is where you pay the residual profits to the owners of the company after all the obligation has been met. The two-key difference between debt and equity are debt is a borrowed fund whereas the equity is owned fund meaning equity shareholders are said to be the partial owners of the company. The debt is for fixed period of time or a fixed term but the equity as an instrument is perpetual, there is no maturity for this. In situation like this it is better if the business is funded by equity because in equity there is no obligation to make the periodic payment and you can save the cash at this stage.

b) For a large publicly traded firm the firm can go for FPO, FPO is the subsequent public offering which is done by company to raise money through equity which have already raised money through equity once. For debt financing it can go for private placement to large HNI investors.