Assume that you are the CEO of a medium size company in the U.S. Your company is contemplating raising capital by selling debt securities and equity securities. Discuss the advantages and disadvantages if any associated with this plan.
ADVANTAGES OF DEBT COMPARED TO EQUITY
- Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company.
- A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth.
- Except in the case of variable rate loans, principal and ...
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