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You are the Finance Manager of a multinational organization that has urgent financing needs. The CEO...

You are the Finance Manager of a multinational organization that has urgent financing needs. The CEO asks you to explain the differences between Debt and Equity Financing. He also wants to know which one is the best choice?

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Debt financing refers to borrowing from outsiders whereas equity financing refers to financing with the use of owner's funds. Debt financing requires repayment of the amount borrowed and fixed interest to be paid. This is to be paid irrespective of profits earned by the company. However in case of equity financing dividend is paid at the discretion of Management. The principal amount also need not be repaid by the company since it represents on capital.

The cost of debt financing is lesser due to tax benefits received on interest payments. However excessive debt financing can reduce the creditworthiness of the company and also cause a great burden on the profitability. Hence there is no best choice and the form of Financing has to be selected depending upon the state and requirements of the company.

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