Business financing and the capital structure Assignment

Business financing and the capital structure - Assignment ExampleCompanies can either decided to routine equity or debt or a combination of the both. Whichever source is chosen the following should be noted Debt pay is a source that earns a frosty return (interest) to the lender. The interest is fixed at the par value of the debt (face value). This source of finance is ideal to be sought by a corporation that has a strong base of equity. Debt funding is only available to qualified companies based on credit ratings, and its availability is limited to the value of the security provided (Chandra, 2011).Advantages of Using debt finance first, the interest charged on the debt is tax allowable. Second, the cost of debt is fixed regardless of the profits made by a company and due to that, under spunky profits, the cost of debt becomes lower. Third, it does not involve many formalities and due to that, it is suitable when a source of finance is required urgently. Fourth, if the debt is long-term, the amount owing declines with time, thus reduces the refund burden to the borrower. Fifth, this type of finance does not influence a companys decision since creditors do not participate in the annual global meeting (Chandra, 2011).Disadvantages of debt finance first, it can only be invested with the lenders approval. Second, when used in excess, the creditors might demand a representation on the control panel of Directors. The representation might affect a companys decision-making. Third, it is risky to use it during an economic decline because its usage might send a company into receivership. Lastly, it is only available for specific ventures, thus might affect the flexibility of the companys investment strategy (Chandra, 2011).Equity capital - it is raised from the state-supported through the sale of ordinary shares. This source of finance is available exclusively to Limited Companies. It is a changeless finance source, as the shareholders cannot review this cash eject under liquidation. It is, along these lines,