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Capitalize with Debt Instead of Equity

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So far, we have discussed forming a corporation by making capital contributions to the corporation - in other words, shareholders contributing money or other property to the corporation in exchange for stock in the corporation. However, that is not the only way to capitalize a corporation. Another way is to capitalize it with debt by borrowing money from banks or other lenders to finance the corporation (where the banks or other lenders are not necessarily direct owners of the corporation). What are the costs and benefits of pursuing more debt as compared to using all equity. Which do you think is better? Why?

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I believe that pursuing more debt, may actually be the better method of capitalizing a corporation, due to the fact that borrowing from banks and other lenders give the corporation a means of obtaining the funding that is necessary to support its operations and/or growth, without the bank obtaining any ...

Solution Summary

The solution discusses capitalizing with debt vs equity and the costs and benefits.

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