...Debt versus Equity Financing Debt versus Equity Financing Client Letter Accounting Associates 1425 Accounting Dr Chicago, IL 68572 April 18, 2015 John Doe, Chief Administrator XYZ Corporation 123 Somewhere St. Anywhere, USA 12345 Dear Mr. Doe: It was good to see you at the community fund raising event last Saturday afternoon. It is an honor to support this event for our community. In our meeting of February 16, you asked for guidance on the best possible approach in financing capital for your new corporation. There are two alternatives in financing, debt financing, which is borrowing from a lender and equity financing, which is selling of stocks to investors. It would be our recommendation as a start-up corporation to utilize both forms of financing to raise your capital while keeping debt financing to the minimum. In reaching this conclusion we considered the advantages and disadvantages, listed below, of debt financing versus equity financing. We reviewed the Internal Revenue Service’s (IRS) approach on this matter and in consideration of code section 385 which is used to determine if the financing is debt or equity. The IRS may re-characterize debt financing to equity financing under this code section based on the circumstances of the financing (Antebi & Krauthamer, 2014). Advantages of Debt Financing | Disadvantages of Debt Financing | Interest paid is a deductible expense | Reduced cash flow due to monthly payment | Shareholders do...
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...Debt Versus Equity Financing Paper Ranithia Settles December 16, 2013 ACC 400 Kylene Smith In this reading the following objectives will be discussed, the definition of debt financing, equity financing along examples of each. This reading will also discuss which alternative capital structure is has more advantages and an explanation will be given. Debt Financing Debt financing is defined as the method of financing in which a company receives a loan and gives its promise to repay the loan ( (Entrepreneur.com, 2013). An example of debt financing is secured loans. Secured loans are loans that require collateral of some sort. There are several types of securities such as guarantors, who sign an agreement stating they will guarantee payment of the loan. Equipment provides 60- 65 percent of its valuable as collateral for the loan, and real estate is either commercial or private can be counted for up to 90 percent of its assessed value. Unsecured loans are typically short term as they require payment with six to eighteen months, Intermediate-term loans are to be paid back within three years, and then there are long-term loans that require payment from the cash flow of the business in five years or less. Equity Financing Equity financing is defined as method in which a company issues shares of its stock and receives money in return (Entrepreneur.com, 2013). Depending on how the equity capital is raised it is possible to bow out anywhere from 25-75% of the business. An example...
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...Debt Verses Equity Financing Dean Lilyquist ACC/400 September 29, 2014 Rangan Giri Debt vs. Equity Financing The judgment to rent or buy significantly depends upon requirement as well as financial position. For instance, an organization may rent a piece of property or equipment in case the requirement for such will be short-term. A company has leased a business place for recent years while they were buying as well as building their long term office. Additionally, while finishing a building job, in case an additional machine is required, a business may lease the machine for much lower than having to buy. Some companies may just require a particular machine for one task; therefore a purchase is much too costly. Currently, if a business would see where they have required leasing a particular machine many times, the company will roll the lease into a purchase. What is Debt Financing? Debt financing is when a firm raises working capital through by selling bonds, bills, or notes to individuals and institutional investors. This method allow for the individuals or institutions to become the company’s creditors versus that of the traditional financial institution. Debt financing is desirable by many individuals as it is traditionally a safe way of investing and the investment typically carries a guaranteed rate of return in the form of interest on the principal invested. The debt and interest will be repaid on a set schedule according to the terms of the bond,...
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...Debt versus Equity Financing Stacey Nicholas ACC/400 April 9, 2012 Alice Bergmann Debt versus Equity Financing Debt financing versus equity financing, which financing has more advantages over the other financing. Debt vs. equity financing is the most vital decision a manager will face when determining the needed capital to fund his or her business operations. Both types of financing are the main sources of capital that is available to a business. Both types of financing have advantages and disadvantages when a manager or owner is trying to raise capital. Debt Financing Debt financing can either be long-term or short-term and either secured or unsecured. Debt financing is obtained from a bank and will take the form of loans that must be repaid over-time along with an added fee known as interest. This loan will allow a borrower to finance daily operations. Debt financing offers a business an advantage from paying the interest rate on the loan. The advantage is the interest can be used as a deductible at the end of the year. Debt financing has a disadvantage, if a business has irregular cash flow they will have difficulty in making regular payments on their loan. When a business obtains a secure loan, the bank will hold a title for portion of the investment in exchange for cash. The portion the bank holds onto can be used for collateral in the case the loan is not paid by the maturity date. Equity Financing Equity financing is in the form of money obtained through...
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...selecting the proper financing sources Knowing the costs of financing is a prerequisite. This assignment is regarding the financing issues of business. it is very necessary to have proper knowledge over the financing terms and methods to obtain requisite financing for the organization. One has to know the costs of financing as a prerequisite before selecting the proper financing sources. In this assignment, several advantages and disadvantages are discussed for different financing methods, cost of finance, financial planning and information and many other issues that help to gain a proper knowledge about the financing in organization. Different books and journals have been used to prepare the assignment. Contents Introduction 3 Requirement 1 3 Task 1.1 : Business needs finance and available sources of finance to a business 3 Equity financing 4 Debt Financing 4 Lease Financing 4 Task 1.2 : Accessing and comparing the implication of the different sources of finance 4 Implication of equity financing 4 Implication of debt financing 4 Implication of lease financing 5 Task 1.3: evaluation of the appropriate sources of finance for the above mention businesses. 5 M1: Critically evaluate each available sources of finance to that particular firm. Evaluation should include the pros and cons, and legal aspects of each source. (Merit M1). 5 Case study 1: An engineering firm 5 Equity financing for this firm 5 Debt financing 5 Lease financing 5 Case study 2:...
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...engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest to 17.6% which points to a WACC of 9.45%. If the firm undertook a more substantial amount of debt, the cost of the debt would not continue to be 7.75% so it is beneficial for HPL to keep its debt low. n the balance sheet. The company lacks sufficient amount of cash to fund the investment so it needed to engage in debt financing to meet its goal. In the 2007 financial statements, HPL had Net Working Capital of $102.5 Million so it has the capital means to pay off creditors, whichallows HPL to use debt financing. Historically, HPL has been a very conservative company and refrained from using debt as a means to finance projects. The current Debt/Equity for HPL’s industry is 49.1%. If HPL used all debt to finance this investment, its Debt/Equity would be 18.7% (See Appendix B); if it used cash in conjunction with debt, the Debt/Equity would be 16.8%. In both cases, the Debt/Equity is closest...
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...Debt and Equity Financing Paper Organizations funding money in the form of capital for their business can be tedious especially if the risk involved is not properly analyzed well. Organizations must be able to identity if the method of funding their capital is going to contribute to the vision and will also provide enough benefits to satisfy investors and lastly if the weighted average cost will generate future income to the business. Organizations fund their business operations through two main sources of capital called debt financing and equity financing. Each in its own way contributes to the finance of the business. Debt Financing Debt financing takes the form of loans that must be repaid over time, usually with interest. With debt financing businesses can borrow money over a short term or long term period. Banks and government agencies, such as the Small Business Administration (SBA) are the main sources of debt financing that businesses can use. The Small Business Administration (SBA) has a loan guarantee program that allows small and minority-owned businesses to borrow money for various business purposes. This organization does not issue loans, but rather guarantees the loans that will be made under its programs by commercial banks and other lenders. Another example of debt financing is the line of credit. This is a bank loan where a business can draw out funds whenever money is needed in the business. These are usually only available to well-established businesses...
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...Debt vs. Equity Financing ACC 400 May 1st, 2012 Debt vs. Equity financing Many businesses find it necessary to expand. The question is how? Business owners look to the advantages of debt compared to equity. These two categories are the main sources of capital for businesses, which there is nothing more important than raising capital. Finding the right balance between debt and equity financing means weighing the benefits of each and involves accounting, investing, banking and sometimes even some legal assistance. Debt Financing Debt financing is defined as taking on a form of loan/loans that must be repaid over time, often times with interest. In order to use debt financing as an option, businesses can choose to borrow from government agencies or banks for short term; which is usually under a year or long term loan over 12 months. Debt financing has it’s benefits to business owners during tax season because the interest paid on loans is deductible. However, the disadvantage is obviously the risk involved with taking out a loan in general, because there is a burden of that debt and failure to repay that debt with irregular cash flow available. For example: Being a student in college I had to choose if I wanted to invest in my future and how financially I was going to pay my way through school. So I chose to take out loans and pay the interest and loan off while in school, I not only took a risk but I did it to expand and grow. Second example...
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...don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed. Equity Disadvantages By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions. If your business takes off, you have to share a portion of your earnings with the equity investor. Over time, distribution of profits to other owners may exceed what you would have repaid on a loan. These are basic terms which are related to Debt to Equity ratio. How to calculate debt/equity ratio Definition The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial...
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...To Lease or Purchase? May 2, 2011 ACC/400 Peter Ioveno To Lease or Purchase? It is important to know when it is a good time to purchase items or lease items, as an individual and in the business world. If you purchase an item at the wrong time, it could easily put a company as risk for financial hard times. The following will detail some important factors to review when purchasing or leasing is an option. The Differences between Leasing and Purchasing Both leasing and purchasing has its pros and it cons. The trick is to figure out which would be better for a company’s current financial status. Leasing allows a lessee to avoid large down payments, keep updated materials, lower lease payments due to shared tax advantages, and the property that is being leased does not show as an asset or liability. These are all positive factors if your company is a smaller company and does not have the cash to purchase the material or only needs the material for a limited time. Next are a few pros of purchasing through a capital lease. Leasing payments on an operational lease might be higher than those payments on a capital lease due to interest rates and since the company does not own the property, it must not be abused or used to harshly because it will be returned to the lessor. A capital lease gives you tax breaks such as deprecation, while operational leasing does not. As stated above, operational leases (rental agreements) and capital leases (purchasing leases) both have...
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...Case Study on Crown Corporation PREPARED FOR Dr. Shaikh A. Hamid FIN 680.1 PREPARED BY Abdullah Resalat Rahman 0930477060 Md. Towhidul Hoq 0930393060 Md. Sabbir Alam 0930391060 Md. Nafiz Enam 0930404060 Debabrata Bhowmik 1020071090 Company Background Crown Corporation started as mining company, but a series of acquisitions and divestitures during the 1960s had totally transformed Crown Corporation from mining company to a manufacturer of superalloy castings for aircraft and industrial uses and aluminum products for the building, packaging and aircraft industries. Sales were evenly divided between castings and aluminum products. Crown’s castings were for the most part designed for operation in the “hot part” of the gas turbine engine. Crown’s constant emphasis on quality and technical excellence had established a high level of confidence among its customers. The other half of crown’s sales comprised aluminum products, including a broad product line for the building and construction industry. To assure a steady and economical source, Crown Corporation participated with American Metal climax, Inc. in a project in 1966 known as Intalco, which made them a producer of primary aluminum. Crown’s share of Intalco’s output was 130 million pounds. Crown decided to build a second aluminum ingot plant in 1967, named Eastalco, which provide Crown with additional primary aluminum capacity of 85 million pounds a year and increased net income...
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...California Pizza Kitchen: Management of the Corporate Capital Structure FIN 6806: Seminar in Advanced Financial Management Dr. Anita Pennathur November 2nd, 2014 Table of Contents Case Summary …………. 3 Problem Statement …………. 4 Situation Analysis 4 Major Strategic Alternatives 5 Decision Criteria 6 Recommendation 9 Appendix 11 California Pizza Kitchen California Pizza Kitchen (CPK) is an American based restaurant which has made a name in serving different types of pizzas, pastas and fast food products. California Pizza Kitchen was established in 1985 in California near Beverly Hills. The company is not only dealing within the United States but it is also serving in six different foreign countries. California Pizza Kitchen has its own restaurants as well as it also has different franchises across the United States and also is involved in a partnership with Kraft Foods to sell its frozen pizzas in grocery stores. Restaurants of the California Pizza Kitchen have a friendly environment, delicious dishes and outstanding offerings. California Pizza Kitchen has its franchises in several countries that include China, Hong Kong, Malaysia, Singapore, Philippines and numerous others. California Pizza Kitchen has also opened in parts of South Korea and the Mexico City. The franchise owners give an advance of approximately $50,000 to $65,000 and furthermore, they also pay 5% of their sales to the California Pizza Kitchen as royalty payments. ...
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...Debt versus Equity Financing Brenda L. Rochelle ACC/400 November 7, 2011 Carl Mir Debt versus Equity Financing Introduction In this paper, the author will attempt to compare and contrast lease versus purchase options by providing definitions of debt financing and equity financing and providing examples of each. Additionally, the author will attempt to address which alternative capital structure is more advantageous and why. Business owners must decide whether to purchase outright, finance purchases, or through a long-term lease. Full rights of ownership are realized when purchasing outright. Financed purchases lessen control of the asset by the buyer. Restrictions may be placed on the buyer’s right to sell by the lien holder in an installment purchase. In a long-term lease, the lessee lacks the right to sell, except for any purchase options available. An alternative is short-term leasing. This alternative frees the lessee of most risks of ownership, specifically obsolescence and maintenance. Additionally, the rental rate reflects these advantages. Choosing between outright purchase, financed purchase, long-term lease, and short-term leasing, causes management to face operational considerations such as maintenance, obsolescence, and the degree of control. Decisions involving financial considerations are necessary when ownership is selected. Debt Financing Debt financing is borrowed money a company receives in return for a promise to repay the loan. This...
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...Debt Versus Equity Financing ACC/400 May 14, 2012 Debt versus Equity Financing Debt versus equity financing is a critical element in the process of managing a business and also the most challenging decision facing managers who require capital to fund their business operations (Schroeder, Clark, & Cathey, 2005). Debt and equity are the two main sources of capital available to businesses, and each offers both advantages and disadvantages. This paper will compare and contrast lease versus purchase options, examine debt and equity financing, provide examples for each source of financing, and identify which alternative capital structure is more advantageous. Lease vs. Purchase Options: Compare and Contrast In business the decision to lease or purchase is a critical element of strategic management. Equally important is the way in which the asset will be used. Operating leases are most often used by organizations looking for fixed payments with no long-term risk, and a limited useful life of the asset. Capital leases are more aligned with the features of a conventional purchase. Purchasing often requires a higher monetary expenditure at the start, in addition to acquiring the financing to purchase through a lender. Leasing usually requires a lesser amount of cash down, and the monthly payments are often smaller. Additionally, leasing offers tax benefits because the full lease payment can be immediately deducted, whereas purchasing only allows the interest...
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...One of the most important form of long term finance nowadays is Lease financing * Advantages of Lease finance over purchase of asset. * Huge capital investment on asset can be eliminated buy lease purchasing of assets. * Risk of depreciation and obsolescence doesn’t affect to the lessee. * Leasing is quickest and easiest method of financing of capital * The periodic lease rents paid by the lessee are tax deductible expenditure. * Leasing increase the borrowing power of the company as its debt equity ratio will be unaffected by lease purchase. * Bad investments can be avoided by lease purchasing. * Lessee can lease purchase and pay for asset only for the time he needs it. * Lease financing is not affected by inflation. Even if the costs go up over some years, you still pay the same lease rent as agreement. * In case of car lease finance or auto lease finance, one can enjoy using latest or high cost cars without buying it for a desired period of time. Disadvantages of lease financing: * Lease financing is a favored means of financing long term capital. However it is having following disadvantages. * Lessee has an obligation to continue making lease rent payments even if he is not economically using the asset because of decline in his business. * Even though lessee is not the owner, he is still responsible for repair and maintaining the asset as specified by the contract. You need...
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