Evaluation Of Debt And Equity Funding

898 WordsApr 30, 20154 Pages
Evaluation of Debt and Equity Funding Debt funding provides the business with finance from current and non-current liabilities, such as a short-term bank overdraft and loans. Particularly, debt financing is from external sources and it usually charges interest. Conversely, equity funding is an internal source that refers to the contributions by owners or shares purchased by shareholders (Battistutta and Duncan 1997). Since both debt and equity funding have pros and cons, the business may be financed through a combination of the two. It is assumed that Healthy Potion has expanded into a corporation. Whether Healthy Potion Company is supposed to place greater reliance on equity than debt to finance the business is a debatable issue ( Chaganti, De Carolis and Deeds 1995). Arguments supporting a larger proportion of financing through equity suggest that the interest expense incurred and the risk of bankruptcy would be lower (Battistutta and Duncan 1997). To be more specific, financing through equity does not require for repayments, while debt financing requires repayments and interest expenses. According to the current situation, Healthy Potion is unable to maintain sufficient liquidity. If the interest rate for loan is high, Healthy Potion is less likely to meet the interest commitments if it is invested by creditors in a large proportion. Hence, a lower leverage may reduce bankruptcy risk for high growth companies in the long term (Shirasu and Xu 2007). However, arguments
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