Therefore, debt investors demand a lower rate of return than equity investors. If external debt or equity is to be used, where should it be raised from and in which form? When it comes to equity finance, for some companies, the new shares must be offered to the existing shareholders in proportion to their existing holdings. With debt finance, short-term loans are cheaper than long-term borrowings. (Jay, 2003,
Although, you share the risks and liabilities of company’s ownership with the coming partners or investors. Since you don't have to pay liabilities and debts, and also you able to use the cash flow generated to further raise the company or to expand into other areas. Keep going or maintaining a low debt-to-equity ratio also allows you to get a better place to get a loan in the future when needed (Kokemuller, 2010). Disadvantages of Equity If a company chooses equity to invest it the company, the owner or the company gives up fractional ownership or partial ownership, however; some levels of having decisions authority over your business. When a company uses much stock investors frequently be adamant on placing representatives on business panel or in decision-making positions.
The company is considering taking on some debt to increase their production capabilities. Their three options include a loan (sweetheart), bonds or an IPO. The firm has expressed interest in the first option (loan). This appears to be a good fit as they have decreased their long-term liabilities from previous years and if they want to expand, extra liquidity will be needed. The firm’s current line of credit is about double what it normally is and the payments on their remaining long-term debts are going to increase through the next four years with a balloon payment due in 2015 of $642,000.
A number of countries are reluctant to open up their financial systems for fear of abuse. To some extent, most financial systems are underdeveloped, which makes difficult the movement of capital. In some cases, private equity is facing enormous difficulties due to administrative delays and the slow approval process of reserve banks, to exit or enter the funds. Among other difficulties, there is the high cost of borrowing (In some countries, the cost of borrowing, may up to 40%, which does not favor investment), strong tax rate and the number of experienced African t fund managers is insufficeant. There is also a lack of institutional bodies to enable the private equity industry players to discuss the issues affecting the sector.
Flexibility One of the big advantages of short-term investing is that you have some flexibility. You do not have to tie up your money for an extended period of time with this type of investment, as is the case, for example, for the many people who purchase a corporate bond that has a maturity of somewhere between 10 and 30 years. With this investment you have to keep it for a long time before it matures. You could sell it in the secondary market, but you may not get what it is worth. 2.
Some of the advantages and disadvantages as researched of the sources of capital. The first should be the bank loans. The advantages of getting a bank loan is the flexibility. With bank loans, the only thing to be worried about is the regular installment payments on time. The best part is that banks don’t monitor how you use the loan as long as you make your payments on time, which means that you can invest it however you want.
In addition, there should be significant improvements in profitability and operating efficiency after the LBO when corporate structure’s comprehensive changes are made, typically layoffs and employment redeployment or complete riddance of unnecessary company divisions. • Tax advantages: A high level of debt provides the benefit of tax savings realized due to the tax deductibility from interest expense. • Management incentives: Large interest and principal payments from the use of leverage can force changes in managerial behavior to improve performance and operating efficiency, specifically to focus on certain initiatives such as divesting non-core businesses, cost cutting or investing in technological upgrades. Also, through investment alongside management, PE firms can encourage top executives to commit a significant portion of their personal net worth to the deal in order to guarantee that management’s incentives will be aligned with their
We do our best so none of our clients have to go through any kind of financial crisis due to tax debt. Our main focus is dealing with the IRS, so you don’t have to. Our company understands not everyone is not capable of coming up with a large amount of money at once. Hence, we talk to the tax authorities’ in order to help find option that will work for both the parties. Options like ‘Installment Agreement’ works great as it gives you the opportunity to pay the money in smaller payments.