Equity and Debt: Analysis of Financing Options and Strategies

This assignment solution explores the concepts of equity and debt financing, defining each and discussing their appropriate applications. Part A defines equity financing as raising funds through the issuance of shares and debt financing as raising funds through instruments like bonds or loans. It highlights that debt financing is beneficial for tax relief, while equity financing is suitable for large capital requirements, using an example of a company needing $25 million. Part B supports the importance of balancing debt and equity, acknowledging the risks associated with each, such as the fixed obligations of debt and the market volatility affecting equity. The solution emphasizes the need to mitigate risks by maintaining a balance between these two financing sources, referencing relevant academic sources (Goh et al., 2017; Silaghi, 2018).

Running Head: Equity and Debt
Equity and Debt
Name of the Student
Name of the University
Author Note

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Equity and Debt
Table of Contents
Part a).........................................................................................................................................2
Part b).........................................................................................................................................2
Reference....................................................................................................................................4

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Equity and Debt
Part a)
Types of equity financing
There are two forms of financing instruments available to an organisation these are
debt and equity, both of these instruments have different characteristic features which can be
assessed from the definition of equity and debt financing.
The process of raiding fund to meet the working capital requirements by selling fixed
interest bearing instruments like bonds or bills or notes to investors or by borrowing money
from bank and other financial institutions is called debt financing.
On the contrary equity financing may be defined as the process of raising of funds by
issuing common shares to the individual investors or to institutional investors.
The debt financing is very effective if the company is trying to get some relief from
its tax burden as the interest that is to be paid against the debt is allowed for tax deduction a
company may try to raise more debt when its tax burden increases significantly.
In case a company is looking for huge amount of capital then in that case it will be
effective to use equity financing method.
For example if XYZ company requires huge amount of capital for instance US $ 25
million then in that situation it will be better to raise such huge amount from equity financing
rather than debt as it will be cost effective (Goh et al 2017).
Part b)
The statement is correct, it is always better to have an optimum balance between the
debt and equity financing. As both debt and equity have some advantages and disadvantages

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Equity and Debt
it is better for the companies not to rely heavily on a particular source of finance. For instance
even though debt is more risky than equity because a fixed obligation comes with debt but it
will never involve in the ownership right of the organisation unlike equity.
In comparison to debt equity is less risky but there is a major problem with equity
financing which is related with the volatility of the market and the ownership right. If the
market crashes for an economic crisis then in that case the value of the firm will be highly
effected which depends solely on equity. In addition to that equity financing will also effect
the ownership right of the organisation also. So in this context it can be said that in order to
mitigate the risk of both debt and equity financing it will be better to make a balance between
these two sources of finance (Silaghi 2018).

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Equity and Debt
Reference
Goh, B. W., Lim, C. Y., Lobo, G. J., & Tong, Y. H. (2017). Conditional conservatism and
debt versus equity financing. Contemporary Accounting Research, 34(1), 216-251.
Silaghi, F. (2018). The use of equity financing in debt renegotiation. Journal of Economic
Dynamics and Control, 86, 123-143.