Question

Analyze at least two advantages of debt financing over equity financing for a corporation. Discuss your choice of financing and provide support for your choice.

Answer 1

Debt finance means borrow a money which is legally obligated to repay a fixed debt amount at a future date.

Two advantage of debt financing over equity financing.

Tax= payments of interest on debenture get tax deduction , whereas equity finance can't.

Control = equity holders are the owners of business and they have right on business , where as debenture holder doesn't have any right on business.

Conclusion.

Finance arrange by debenture holder than interest in debenture can get deduction due to that taxable income is decrease which is profitable for business.

And also when equity are arranged though debenture than company get finance , but in case of equity company have to share ownership right too.

Using debt finance give tax benefits and also increase EPS of company .