Debt Vs Equity Financing Paper

Debt Versus Equity Financing Paper
Financing is the act of providing money for a project (Business Dictionary, 2011). When providing funds for a business activity, investing, or making purchases. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them achieve their goals. There is a large variety of financing techniques that consumers and businesses can use to cod financing. There are two different types of financing debt financing and equity financing. Each in their own way contributes to the pay of business. The alternative capital structure may be more than(prenominal) advantageous.
Debt Financing
Debt financing is when a firm raises money for capital expenditures or working capital by selling bills, bonds, or notes to individuals and institutional investors. In return for lending the money, the institutions or individuals become creditors and invite a promise that the kindle and principal on the debt willing be repaid.
Equity Financing

Alternative Capital Structure
A firms best capital structure is that mixture of debt and equity than minimizes its weighted ordinary greet of capital (WACC).



Since the after-tax cost of debt is lower than equity for some corporations, why not use debt only or largely? It turns out that, while debt reduces a companys tax liability because interest payments are deductible expenses, change magnitude amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the fiscal venture of a company, and this risk is reflected on the cost of all the types of capital the company uses. As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped curve, with a minimum WACC between the extremes of debt utilization.
Apart from the risk associated with a firms fundamental operations...If you want to get a upright essay, order it on our website: Orderessay



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