Debt Versus Equity Financing Paper

Essay by arualUniversity, Bachelor'sA, June 2010

download word file, 4 pages 0.0

Running head: DEBT VERSUS EQUITY FINANCING 1 DEBT VERSUS EQUITY FINANCING � PAGE \* Arabic \* MERGEFORMAT �2�

Debt Versus Equity Financing Paper

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ACC/400: Accounting for Decision Making

June 7, 2010

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Debt Versus Equity Financing Paper

The adage It takes money to make money is used by many individuals when contemplating how to make money. The adage holds true for businesses as well; businesses need to finance operations with debt and equity ultimately to make money. The following questions ensue, what are debt and equity financing? and is one type of financing more advantageous than the other? Debt and equity financing will be examined in this paper as well as if one of the capital 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 receive 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 can be short-term or long-term. Short-term financing is full repayment within one year whereas long-term financing is repayment over more than one year. Examples of debt financing are "selling 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 ownership 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...