Discuss about the Debt Financing and Equity Financing.
Choosing the appropriate source of finance for our pertained business tends to be a difficult task this is because of the funding options available (Lipman, 2016). In our case, we are using two methods of financing they are; debt financing and equity financing. Therefore, to choose the best method that our case company should apply conducting a critical analysis tends to be a vital part. In conduction of critical analysis, we will have to consider certain factors using the financial information provided.
It is an important element that should be kept under consideration. Here, we look at the financial commitments that relate to a particular source of finance. This relates to what would happen if the firm borrows loans or consider using equity coming from shareholders (Lipman, 2016). Look at the firm’s financial leverage value debts stand at 1.54 and equity stands at 1.36. If the firms decides to borrow money for investment and the market seems to favor their investment the firm’s profits are likely to be higher than equity method of funding. Debt financing also allows the firm leverage small amounts of money into larger sums, meaning that the firm will be able grow rapidly. On the other hand funding, through debt as shown in the financial data time interest earned tends to be less that at equity funding.
Cost of finance plays a critical role in financing decision. The concept here is lowering cost and maximizing wealth (Phelps, 2015). From our financial data, additional borrowing through debts requires compensation for risk. Hence, this means there will be increased cost of equity. Issuing of new shares may serve as a strategic shift of focus for the firm because in debts financing there is a higher price per share compared to equity financing (Phelps, 2015). In addition, the business relationship ends once the debt is paid back which means there will be growth in the firm.
In general, the firm board plan on expansion should consider using the 15% interest rate debt because of the high financial leverage and the time interest earned is also less. Hence, this means that the firms will definitely succeed in their expansion plan.
Lipman, F. D. (2016). New methods of financing your business in the United States: A strategic analysis.
Phelps, C. W. (2015). Accounts receivable financing as a method of business finance. Baltimore: Educational Division, Commercial Credit Co.