Ch 10 - DEBT vs EQUITY FINANCING - 5) too much debt...

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DEBT FINANCING - any money that your business borrows and is obliged to pay back. Advantages: 1) debt does not dilute the owner's ownership interest in the company 2) lender has no control in how the business is run 3) if the company is successful, the owners keep a larger portion of the rewards than they would if they had sold stock in the company 4) business profits can be put back into the company 5) principal and interest obligations are known amounts which can be forecasted and planned for. 6) interest paid on the loan is generally tax deductible 7) less complicated than equity financing which requires compliance with state and federal securities laws Disadvantages : 1) must at some point be repaid (which requires additional cash flow) 2) 3) too much debt restricts growth (b/c of the high cost of servicing the debt 4) risky loans result in high interest rates
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Unformatted text preview: 5) too much debt restricts future fund raising EQUITY FINANCING : money received in exchange for a share of ownership Advantages : 1) business is not obligated to repay monies (even in cases of bankruptcy) 2) involvement of high-profile investors can assist in managing the firm & may increase credibility of a new venture 3) more cash available to the new venture b/c there are no debt payments 4) business assets do not have to be pledged as collateral Disadvantages : 1) dilution of ownership interest 2) less (or loss of) control due to sharing of ownership 3) loss of future profits. 4) dividend payments in C-Corporations are not tax deductible Sources: equity
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This note was uploaded on 03/28/2011 for the course MNGT 305 taught by Professor Chadwick during the Spring '11 term at Nicholls State.

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