Significance of Debt, Equity and Capital Structure Student`s

  • Uncategorized

Significanceof Debt, Equity and Capital Structure

Significanceof Debt, Equity and Capital Structure

Theresearch findings on the subject matter present different benefits asfar as both debt and equity options are concerned. A company such asyour corporation would be better off with debt option unlike equityin which the latter proves to be costly when the prevailing interestrate is low. As such, matters relating to financing costs are kept ata minimum when debt option is preferred. As stipulated by Brealeyand Stewart (2002), using debt as a financing option results intomuch profits being kept within n the company, and consequently,enhances good returns on equity in addition to assisting corporatemanagement secure its tax savings.The debt financing is viable, and when corporation initiate effectivemanagement, it can encourage more cash flow. Furthermore, with thisoption, the new corporation is likely to benefit following taxadvantage over the debt because when the interest is categorized as adebt, then it can be deducted and the amount repaid as the principalwill not bear the consequences of tax.

Itis of great significance to understand debt and equity financing.Debt financing is all about a means through which organizations orcorporations raise money to meet the capital expenditure throughdebts or loans (Flannigan,2011).On the other hand Equity financing relates to the issuance oforganization’s shares, and get money in return. Whenperformed well, the corporation can relinquish good returns of thebusiness.Debt financing is beneficial to the company because the corporationwill not surrender the control of any portion of the business.Secondly, it is similar to bank loans, and as a result, the lenderhas no chance to intervene on the affairs of the organization. Inmost cases, a mere obligation is necessary for the repayment of thesum of money borrowed, and upon the fulfillment of such, no legalrelationship exists with the lender, and allows the firm to pay forthe assets to achieve the overall growth of the business prior to anyearning (Kokemuller,2015).The debt financing also allows for settling of debt throughinstallments, new or upcoming business like yours can have ample timeto settle the deficit without unnecessary pressure.

Oneof the advantages of equity financing is that there is no repaymentof the debt. Due to this, the amount generated by the business can beploughed back into the business to further the growth of theorganization or to some extent the money can be used to diversifythe business. Equity financing also gives room for sharing of bothrisks and liabilities of the corporation with the potentialinvestors, and lastly, one can secure an opportunity to get a loan inthe future due to low debt-to-equity ratio (Chiang,Di and Hanke, 2010).In my detailed analysis and interpretation of both options of raisingmoney to start up a new corporation, I can provide that debtfinancing is the best option for your organization. When the cost ofdebt is compared to the cost of equity, the former is morebeneficial. Paying up the accumulated interest plus the principal onthe sum borrowed is better than sacrificing part of the profitsearned in equity financing, the cost of loan is finite than selling astake of the organization because no further obligations bound theparties together once it is cleared (Seppa,2008).As a result, it is cheaper and profitable for you to go foe equityfinancing.

References

Brealey,R. A. &amp Stewart, C.M. (2002). Principlesof corporate finance.(6thed.).McGraw Hill.

Chiang,W., Di, H., &amp Hanke, S. A. (2010). Debt or equity financing?Analyzing relevant factors.&nbspTheTax Adviser,&nbsp41(6),412-417.

Flannigan,R. (2011). The debt-equity distinction.&nbspBanking&amp Finance Law Review, 26(3),451-472.

Kokemuller,N. (2015). Theadvantages and disadvantages of debt and equity financing.Hearstnewspapers,LLC. Retrieved fromhttp://smallbusiness.chron.com/advantages-disadvantages-debt-equity-financing-55504.html

Seppa,R. (2008). Capital structure decisions: Research in Estoniannon-financial companies.&nbspBalticJournal of Management,&nbsp3(1),55-70.

Close Menu