Financing with Debt Versus Equity. It is commonly understood that the cost of financing a business’sasset purchases with debt is cheaper than financing those purchases with equity. Discuss why debt financing is cheaper than equity financing. Is there a set of circumstances when the cost of debt financing would exceed the cost of equity financing? If so, when?

Financing with Debt Versus Equity. It is commonly understood that the cost of financing a business’sasset purchases with debt is cheaper than financing those purchases with equity. Discuss why debt financing is cheaper than equity financing. Is there a set of circumstances when the cost of debt financing would exceed the cost of equity financing? If so, when?

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter13: Long-term Liabilities

Section: Chapter Questions

Problem 20MC: The difference between equity financing and debt financing is that A. equity financing involves...

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There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the company
The difference between equity financing and debt financing is that Group of answer choices A. equity financing involves borrowing money. B. debt financing involves selling part of the company. C. debt financing means the company has no debt. D. equity financing involves selling part of the company.
Why mix of equity and debt finance being preferred in financing businesses?
Discuss the implications of financing through debt as they compare to financing through equity. What are the pros and cons of each method? Which method would you use to raise capital for your business?
Your WACC formula is a simplified version for a company using only debt and equity. In a real business context, how would you adapt and expand the original formula to account for a different type of financing?
The difference between equity financing and debt financing is that a. equity financing involves borrowing money. b. debt financing means the company has no debt. c. equity financing involves selling part of the company. d. debt financing involves selling part of the company.
A common problem facing any business entity is the debt versus equity decision. When funds are required toobtain assets, should debt or equity financing be used? This decision also is faced when a company is initiallyformed. What will be the mix of debt versus equity in the initial capital structure? The characteristics of debt arevery different from those of equity as are the financial implications of using one method of financing as opposedto the other.Cherokee Plastics Corporation is formed by a group of investors to manufacture household plastic products.Their initial capitalization goal is $50,000,000. That is, the incorporators have decided to raise $50,000,000 toacquire the initial assets of the company. They have narrowed down the financing mix alternatives to two:1. All equity financing2. $20,000,000 in debt financing and $30,000,000 in equity financingNo matter which financing alternative is chosen, the corporation expects to be able to generate a 10% annualreturn, before…
(1) What factors might lead a company to gainadditional funds through debt financing rather thanthrough equity financing? (2) Why does consumerdebt have a more negative connotation than businessdebt?
Given asymmetric information between investors and managers, )How would investors interpret firm’s decision to finance through debt? )How would investors interpret firm’s decision to finance through equity? )How would investors interpret firm’s decision to buy back its equity? )Given the signaling theory above, what is the implication on firm’s financing preference (hint: pecking order hypothesis)?
Difference of traditional debt and alternative financing instruments for entrepreneurs
Which of the following is a disadvantage of long-term debt as a means of company financing? Group of answer choices Debtholders have preferential status in the event of a company being wound up. Tax relief is available on interest payments. Debt is often quicker to arrange compared to equity. The amount and timing of interest payments is predictable, making budgeting easier.
Which statement is most correct? * A. Since debt financing raises the firm’s financial risk, increasing debt ratio will increase WACC. B. Since debt financing is cheaper than equity financing, increasing debt ratio will reduce WACC. C. Increasing a firm’s debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the firm’s WACC. D. Statements a and c are correct. E. None of the above