Debt Versus Equity Financing Paper
ACC/400: Accounting for Decision Making
June 7, 2010
The adage It takes currency to make money is apply by many individuals when contemplating how to make money. The adage holds true for businesses as good; businesses need to finance operations with debt and equity finally to make money. The following questions ensue, what are debt and equity financial support? and is one attribute of financing to a greater extent advantageous than the other? Debt and equity financing give be examined in this paper as well as if one of the not bad(p) structures may be considered more advantageous than the other.
Debt Financing
Debt financing occurs when a business raises money for working capital or capital expenditures by borrowing money from individuals, banks, and financial institutions, and in return for lending the money, the individuals, banks, or financial institutions become creditors and gain vigor a promise that the principal and interest on the debt will be repaid (Investopedia, 2010, para. 1). Hence, debt financing represents creditor claims. Debt financing roll in the hay be short-run or long-term. Short-term financing is full repayment inside one year whereas long-term financing is repayment oer more than one year. Examples of debt financing are change bonds, bills, or notes to individual and/or institutional investors (Investopedia, 2010, para. 1).
Equity Financing
Equity financing is raising money by selling shares of self-will in a business. Hence, equity financing represents ownership interest (Schroeder, Clark, & Cathey, 2005, p. 343).
In exchange for investing money into the business, the investors receive a piece of ownership of the business and can receive dividend payments. Examples of equity financing are selling common stock or preferred stock to investors (Investor Words, 2010).
Advantageous Capital Structure
Although both types of capital structures have advantages, the main factor in determining which is more...
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