ACC 400 Week 4 Individual Assignment Debt Vs. Equity Financing Paper
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Week 4: Debt vs. Equity Financing
In order for a business to undertake new endeavors there is a need for working capital. Often this capital comes in the form of the company reinvesting its own cash back into itself. However, more often the company must search for outside sources of capital in order to finance projects. Many companies resort to the traditional lines of credit extended by established financial institutions. But once projects reach the point that huge amounts of capital is needed there are other options available to the companies such as debt financing and equity financing.
What is Debt Financing?
Debt financing is when a firm raises working capital through by selling bonds, bills, or notes to individual and/or institutional investors. This method allow for the individuals or institutions to become the company’s creditors versus that of the traditional financial institution. Debt financing is desirable many individuals as it is traditionally a safe way of investing and the investment typically carries a guaranteed rate of return in the form of interest on the principal invested. The debt and interest will be repaid on a set schedule according to the terms of the bond, bill, or note. “Debt financing is more risky than equity financing because debt must be repaid at specific points in time, whether the company is performing well or not. Thus, the higher the percentage of debt financing, the riskier the company” (Kimmel, Weygandt, & Kieso, 2007, p. 60).
ACC 400 Week 4 Individual Assignment Debt Vs....