Question.3948 - Chapter nine covers long-term debt and chapter 10 covers stock. When companies raise money by borrowing money, we refer to this as debt financing and when companies raise money by issuing stock, we refer to this as equity financing. Why do investors and analyst generally view debt financing as more risky than equity financing? Give specific examples of characteristics associated with each type of financing.
Answer Below:
Debt financing, or borrowing money, is riskier since a business must repay the loan and pay interest on a monthly basis regardless of its earnings. For instance, those payments may become a significant burden and may result in bankruptcy if business slows down. However, since dividends are voluntary and based on profitability, selling shares, sometimes referred to as equity finance, allows businesses more choice and does not demand repayment (Vipond, 2020). Selling shares, however, involves giving up a portion of the business, and owners assume the risk of only making money if the stock appreciates in value or if dividends are distributed. References Vipond, T. (2020, January 28). Debt vs Equity Financing. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/commercial-lending/debt-vs-equity/ More Articles From Accounting
.ico)
.ico)
.ico)
.ico)
