Question

Research and then discuss the implications of financing through debt as they compare to financing through equity. What are the pros and cons of each method? Which method would you use to raise capital for your business?

Using the 2017 Annual Report information provided for Amazon and Target, review and compare the debt to equity ratios, and any additional notes/disclosures relative to debt and equity financing for both companies. Do you believe that each company has made the best decisions with respect to how to raise capital for the company? What conclusions can be drawn from the information provided in the annual reports? If you were in charge, would you have handled it differently and why?

Answer 1

Sourse of financing - we always tried to find the best source of financing with low cost bearing financing. Company always interested in those sources which gives the company lower risk and lower cost.

Company always prepfer to use either the debts or equity source of financing or mixed i.e both debts as well as equity.

Equity always gives the company lower risk than the Debts financing . In debts financing companys has to pay certain percentage of interest to money lander and after the certain period of time company have to repay the principal amount as well but in the case of Equity financing company have to distribute the residual earnings to the shareholder as the shareholder are the owner of the company. Even the company not able to earn profits in any respective years then shareholder can understand the facts and would not demand for the dividend . if comapny doesnn't make any profits than company is not liable to distribute any dividend until company has any past profits for distribution.BUT in the case of debts financing even the company make losses the company has to pay the interest to the money lenders at the agreed rate of interest.Debts financing always reduces the earning of shareholders but it gives some tax benefits as well ,companny has to pay lesser tax.

Amazon annual report 2017 shows that all the interest expense that the company spent which was on lease agreemnet and long term debt financing to increase the capital of the company.