Debt Verses Equity Financing Essay

774 Words Sep 23rd, 2014 4 Pages
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.
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In this manner, companies can restructure their debt.
What is Equity Financing?
As with debt financing, equity financing is another way that a company can generate capital through offering stock in the ownership of the company. This ownership can be in the form of common or preferred stock depending on the investor. Preferred stock has a greater claim on the assets of the company issuing the stock as well as the first rights to any dividends being paid out. When an organization reaches the point that others desire having an ownership share in the organization, companies can offer their stock in return for working capital. As the company performs well, the stock becomes more desirable and thus its value goes up on the market.
Adversely, poor performance financially will deter investors from wanting to hold the stock and thus the price of the stock falls. If the value reaches a high enough point, the company can issue more stock in an attempt to generate more capital and to deflate the stock so as to keep it in the tradable price range. Though sometimes the company could be poorly managed and thus not be profitable, and their stock will rise.
Alternative Capital Structure
The objective of the capital structure is to reduce the cost of capital. Though debt is cheaper than the