Question

Discuss the advantages and disadvantages of the following types of financing: PLEASE DO NOT REPOST PREVIOUS answers on Here. We are looking for a FRESH approach.
1. Issuing bonds
2. Borrowing from the bank
3. Equity financing
Provide an example of how a public company has relied more on one method of financing than the others and why it has done so.

Answer 1

Choosing the right source of finance as important as choosing the best business company needs to operate. Equity bonds and borrowings are necessary for the business and help the business in one or the other way but choice depends upon the nature and size of the company. There many advantages and disadvantages of raising capital a debt or equity, some of which are as follows:-

Advantages to equity financing

1. Less risky because we don’t have to pay it back,

2. No fixed repayment period because the business goes for ever and repayment is only given in case of liquidation of the business.

3. No fixed charge against profits

Disadvantages:-

1.         Return may be higher than market rate.

2.         Investor will acquire ownership.

3.         Dividend on Equity is not tax deductible

Advantages of Bond financing:-

1.         It is easy to plan because of known figures of principals and interest.

2.         Tax benefits because interest on loan is deductible expense

3.         It acts leverage and helps in capital gearing.

Disadvantages of Bond financing:-

1.         Fix liability creates pressure.

2.         Too much debt reduces the credibility.

3.         Debt is riskier because assets are held as collateral.

Advantages of Borrowing from Bank

1. It provides ownership of money.
2. It helps in growing of the business.
3. It increases debt to assets ratio and debt to equity ratios

Disadvantages of Borrowing from Bank;

1. It requires a long and lengthy application process before approving a loan
2. Poor credit history poses a difficulty in obtaining a favorable loan terms or even for securing a loan at all.
3. It hampers the monthly cash flows because paying principal and interest each month decreases the amount of cash in hand.

There are advantages and disadvantages of all the types of financing, therefore a mix blend of all will act as good way to finance business because disadvantages of one type of financing can be adjusted form the advantages of the other and will help to reduce the downside of each type of financing.