Cost Financing And Equity Financing

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Debt and Equity1 Moving right along, outlined next will be several funding options available for start-up businesses that enable people, like me, to be able to put our dream in motion. There are two types of capital that can be raised, debt and equity. Now some would think that as long as there are funds there to work with, regardless of how they were procured, the end result would be the same. However, that is not the case. Debt financing and equity financing have significant differences in how they affect the business’s bottom line and in how they are acquired. For instance, the interest paid on a business loan (option for debt financing) is tax deductible, therefore decreasing the amount of taxable income and increasing overall…show more content…
First up we have bonds, not to be mistaken with stock characteristics (which provide ownership in a company), a bond is essentially a loan from the purchaser. “When a small business issues a bond, it is borrowing money. The person who purchases the bond loans your company money in exchange for a return on his money (Johnston, 2016).” Just like a business loan (to be discussed next) the interest that is paid to these bond holders is tax deductible and there is a specified amount of time before the amount is expected to be paid back. For instance, if you purchase a $1000 bond with a 10/yr. maturity and 8% annual interest rate at its par value, you are expecting to get 8%/yr. on the $1000 bond issue (loan to the company) with a return of principal (in this case $1000) at the end of the 10th year. Bond interest rates (aka the discount rate and/or required return) “is the rate of interest prevailing in the market for bonds of the same risk and maturity (AAII Journal, 2008)” and “is the sum of all future cash flows, discounted in value because they are not available today (AAII Journal, 2008).” The discount rate (interest rate/required return) is used to calculate the future value of the bond sold today. When a bond sells for less than its par value (value of the bond), it is said to be selling at a discount… when more than its par value, a premium. They have an inverse relationship with interest rates, which is a
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