Capital Budgeting | Debt Financing vs Equity Financing

Topic: Capital Budgeting/Debt Financing Question/Prompt: Is there a more responsible way to budget for long-term or significant expenses? In other words, is one debt financing tool better than another? 300 words

Running head: CAPITAL BUDGETING- DEBT FINANCING
Capital budgeting- Debt financing
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CAPITAL BUDGETING- DEBT FINANCING
Debt financing vs. Equity financing- which is the best possible way should the business go
Extracting the capital budgeting, financing decision is taken into the considferation. Debt
financing is not only the better way to go for long term vision for the capital infusion. Other than
debt financing, equity financing is also a more important tool for taking a financing decision.
Debt financing is a concept of borrowing money from the interested lenders that the company
will eventually payaback along with interest. Taking a capital out of a loan mean to be financed
something with debt. Whereas the equity financing referes to the funds generated by the sale of
stock. Equity financing is where the entity transfer the its ownership to the angel investors or the
venture capitalists, in return for their capital.
On the short term perspective, the business should go for debt financing because there are
some benefit to use this tools for financing as follows:
 With the help pf business loan, the organization are in control that how that extra amount
gets spent.
 Debt financing is a flexible category.
On the other hand, the benefit of the equity financing are as follows:
 The business organization do not have to pay the interest on the raising capital, there is
no point to keep the business profits into debt repayments.
 Liquidity position in terms of cash will be available more to grow the business.
Estimating the cost of debt capital represent the interest rate that required by the lender
whereas the cost of equity financing do not require any interest rate, determination is based on
the capital assets pricing model (CAPM) (Elbannan, 2015).

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CAPITAL BUDGETING- DEBT FINANCING
If the company go for longterm investment needs a lot, then the organisation should go
for equity financing on the other hand, if a company needs some money then the best possible
way to consider debt financing. Equity financing (Nguyen, & Rugman, 2015) is also better than
debt as in debts financing, it affects the credit score of the business, if there is a default to pay the
loan there will be a possibility to seize the assets by the lender. Therefore we can say only debt
financing is not better, depending on the business situation, entity should take decision. Equity
financing has also its own importance for capital financing into the business.

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CAPITAL BUDGETING- DEBT FINANCING
Reference
Elbannan, M. A. (2015). The capital asset pricing model: an overview of the
theory. International Journal of Economics and Finance, 7(1), 216-228.
Nguyen, Q. T., & Rugman, A. M. (2015). Internal equity financing and the performance of
multinational subsidiaries in emerging economies. Journal of International Business
Studies, 46(4), 468-490.