Question

1. What is the difference between debt and equity loans/investments? What should a business owner consider when considering business capital in the form of debt or equity?

2. Why are ethics important in finance?

Answer 1

Debt loans require the payment of interest rates on a regular basis, whereas equity loans are in the form of selling of shares to the investors. It gives shareholders to get dividends and have the voting rights. Here, the payment of dividend, depends upon the profitability of the company and its policy. In contrast to it, debt holders do not get voting rights.  Debt loans attract liquidation when interest is not paid on time and it is a financial risk. But, equity shareholders can sell off their shares to some other parties and move out of the company.

There are different factors as follows to be considered before going for debt and equity capital.

1. Timing and regularity of cash flow ( regular cash flows, will make them opt for the debt and irregular flows, will make them opt for equity)

2. Willingness to share the control  ( trying to exert full control, will make firms go for the debt, otherwise opt for the equity)

3. Nature of business ( cyclical business demands equity and consistent business across the year, may go for debt)

4. Cost being incurred ( cost of equity and cost of debt, will be compared. Cheaper loans will be preferred first)

5. Economic conditions ( a good economic conditions will make firms opt for the equity, otherwise go for the debt loans)

Ethics are important in finance, because it helps acquire finances in such a way that it is safe, cheap and most suitable for the organization. Ethics further help in an efficient deployment of funds so that proper gains or return is achieved by the organization. Hence, ethics helps in efficient procurement and deployment of funds in the company.