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    What are the advantages of debt financing over equity financing?

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    What are the advantages of debt financing over equity financing? Of equity financing over debt financing?

    Please provide scholarly (for example recent journals, website, and academic text) references.

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    Please see the info down below.

    UPDATE FROM OTA: This is an issue of firm's financing decision or capital structure decision. A firm's optimal capital structure is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC).

    Let us discuss the advantages of both.

    Pros and cons of equity financing...

    Equity can be raised either by private placement or by public. It has following features:
    Advantages of raising shares
    Permanent Capital: It need not be paid back
    Borrowing Base: It can be used to trade on equity
    Dividend Payment Discretion: The payment of dividend is in the hands of management

    Advantages of Debt financing

    The debt may include loan from the financial institution or bonds.
    Advantages
    Less Costly
    No ownership Dilution
    Fixed payment of interest
    Reduced real obligation

    Conclusion
    Thus there must be optimum balance of the two to have minimize the weighted average cost of capital with the acceptable risk.

    I hope this will help you.

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    Question:

    What are the advantages of debt financing over equity financing? Of equity financing over debt financing?

    Please provide scholarly (for example recent journals, website, and academic text) references.

    Issue of Capital structure
    A firm's optimal capital structure is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC). Since the after-tax cost of debt is lower than equity for many corporations, why not use debt only or mostly? It turns out that, while debt reduces a company's tax liability because interest payments are deductible expenses, increasing amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses. As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped curve, with a minimum WACC between the extremes of debt utilization.

    Apart from the risk associated with a firm's fundamental operations known as operating risk, risk can be introduced by the use of financial instruments with fixed payments, more commonly known as debt. Thus the advantage of taking debt is its lower cost, no share in profits. The limitation is that it increases financial risk. The factors to take into account to determine optimal debt ratio include:
    ? The ...

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