Decision related to mix of debt and equity related to
Answers
Debt Capital
Debt financing is capital acquired through the borrowing of funds to be repaid at a later date. Common types of debt are loans and credit. The benefit of debt financing is that it allows a business to leverage a small amount of money into a much larger sum, enabling more rapid growth than might otherwise be possible.
In addition, payments on debt are generally tax-deductible. The downside of debt financing is that lenders require the payment of interest, meaning the total amount repaid exceeds the initial sum. Also, payments on debt must be made regardless of business revenue. For smaller or newer businesses, this can be especially dangerous.
Equity Capital
Equity financing refers to funds generated by the sale of stock. The main benefit of equity financing is that funds need not be repaid. However, equity financing is not the "no-strings-attached" solution it may seem.
Shareholders purchase stock with the understanding that they then own a small stake in the business. The business is then beholden to shareholders and must generate consistent profits in order to maintain a healthy stock valuation and pay dividends. Since equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher than the cost of debt.
Explanation:
Everything you need to know about the types of financial decisions taken by a company. The key aspects of financial decision-making relate to financing, investment, dividends and working capital management.