Analysis of Capital Budgeting and Debt/Equity Financing Decisions

This report explores the concepts of debt financing and equity financing in the context of capital budgeting. It highlights the advantages and disadvantages of each approach, emphasizing the importance of considering both short-term and long-term financial goals. The report discusses the benefits of debt financing, such as the control over how the borrowed funds are utilized, and the flexibility it offers. It also addresses the benefits of equity financing, including the absence of interest payments and increased liquidity. Furthermore, it distinguishes between the cost of debt capital and the determination of the cost of equity financing using the Capital Asset Pricing Model (CAPM). The report concludes that the optimal financing strategy depends on the specific needs and circumstances of the business, and that both debt and equity financing have their own significance in capital financing.

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.