Question

5. Discuss the role of debt finance and equity finance from the business side, and the financial investor’s (saver’s) side. Considering our discussions over the past several weeks with respect to credit, saving, investment, and crowding out, discuss the implications of each for the long term stability for the economy and for the business.

*Refer Macroeconomics by Gregory Mankiw. 10th edition; please explain the complete answer in a detailed way

Answer 1

The role of debt finance from the business side us that when a person invests in debt finance then that person does not gets involved in the business' decisions. The company can take its decision independently on its own. The company benefits from the debt finance that the it gets capital from others which helps to invest more on their projects. Here, he advantage is that the lender has no control on the business, only the lender needs to be returned it's capital and interest after a certain time period.

From the financial investor's side he/she will get the interest and the capital which he had invested, therefore, he gets s an increased income due to the interest return. The investor dies not have to bother how the company is being run, he only needs to know which company he should invest his money to get better return.

An equity finance from a company's point of view, the company has no obligation to replay the money to its investors. No additional payments are also being made to the investors. The company gets a huge share of capital from equity finance to invest in the company.

From the investor's point of view the investor can interfere in the decision making of the company. The investor can will get a certain percentage big profit if he is an equity investor.