The cost of debt along with the cost of equity determines the capital structure. If the cost of debt increases we can expect a firm to decrease its leverage ratio. The ratio of interest upon the long-term debt is considered as a measure of the cost of debt. Liquidity It is the ease by which a company meets its current liabilities using current assets. A firm with more liquid assets will find it easy to get debt given the fact that in the worst case also the company can meet its current obligations using its current assets.
In this section; the reporter well define some key words and terminologies and also will mention some advantage and disadvantage of debt and equity issues in finance and the third section will discuss why debt offerings are much more common that equity offerings and finally will conclude the discussion. Debt offerings are always referred to or defined as a note or bond that is offered by a company which needs to raise capital which means that the company needs to get some additional capital (Gitman, Joehnk & Smart, 2011). The other important method by which to raise funds is through the offering of stock, or equity. If a company stiff tries to use a debt, as against to an Equity, the business does not weaken the ownership or income of the
Plus, you share the risks and liabilities of company ownership with the new investors. Since you don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed. Equity Disadvantages By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions.
Short-term financing can be obtained much faster than the long term financing. Banks who issue long term financing go through a rigorous process of evaluating the credit worthiness of the firm before issuing a loan. Short-term financing can be availed without going through the hassles of long-term borrowing. 2. If the business is seasonal or cyclical, a firm would not be willing to borrow for a longer period of time.
A new source of financing is creating a vast new wave of mergers and acquisitions. The financing comes from “private equity” firms. These companies pool billions of dollars from private investors and then use that money to seek out and acquire companies that they believe can be made more efficient and effective, and therefore more valuable (Plunkett
Explain why some financial institutions prefer to provide credit in financial markets outside their own country. Many financial institutions want to explore the financial markets outside their country to increase their presence on a much broader market. Also, doing so provides the institutions with better financial security. For example, if their country is experiencing an economic meltdown then the institution would not be greatly affected by such turbulence. Moreover, the financial institutions could earn higher return if dealing with markets that have high interest rates and a steady economy.
It is important to check whether the APR is appropriate. The bad credit is used an advantage to reap more profits by offering loan to such customers. The borrowers will have less chances of a fair negotiation with the lenders. They have to be very careful before inking the deal and must use the loan calculators to find out the amount which will be paid extra. The borrowers have all the rights to ask for a lesser interest rate and a rendezvous meeting will give out appropriate solutions.
Compared to raising money through shareholders, repayment burden is worse because shareholders don’t require regular repayments. The other disadvantage is that the risk of losing collateral. It stands the risk of being lost to the bank. The disadvantage is the irregular payment amounts. If you get a bank loan with a variable interest