Equity and Debt Essay Example | Topics and Well Written Essays - 750 words

lawfulness and Debt - audition ExampleHowever, this is balanced by the requirements of the debt covenant to regularly service that debt that is, the company regularly needs to agnise payments to the issuer of the debt to c everywhere the principle they borrowed and the interest required by the debt covenant. This detriment is offset in some regard through the reduction in tax liability (Seidman, 2005) in short, the payment of debt reduces the amount of income that the company is taxed upon. Equity financing carries with it its own distinct set of advantages and disadvantages. Chief among the advantages of equity financing is the existence of no quittance period of the capital used to expand the business (Seidman, 2005). Since the capital is raised through individuals or businesses purchase a cover of both the company and its future tense tense earnings, the rewards for providing the capital come through an expected growing in the value of their investment. This, however, t ranslates into a disadvantage of equity financing. Namely, while profits are expected to increase, the pie is immediately being divided into more pieces, thus reducing the value of the existing s prefers. Further, with the issuance (or release) of additional nisus into the market to support an equity financing endeavor, the company becomes more susceptible to outside influences, whether through capableness takeovers or through some loss of control of the finis-making process (Seidman, 2005). I neither fully go nor fully disagree with anxietys decision to proceed with equity financing instead of the intend debt financing in the expansion of their manufacturing capabilities. Equity financing makes sense, especially in light of the 305% rise in the companys stock price over the past year (American Superconductor, 2003). Management is able to take advantage of the ability to raise capital with less dilution of current stockholders shares than would otherwise be expected in an envi ronment of stable share price. Debt financing, too, makes sense in regard to the fact that with the government project proper profitable a quarter ahead of expectations and with the massive savings in operating expenses, debt financing would provoke been rather easy to service (American Superconductor, 2003). Using that approach, no dilution of stockholder value would be necessary and in that location would be no potential for a loss of corporate autonomy. Further, with an eye again to lower future operating costs and an unexpectedly profitable revenue stream, debt financing would have lowered the potential future tax burden that the company will soon be faced with. Instead of management travail either approach, I believe that a third option would be best. With the companys results that lend themselves to support debt financing as well as a nearly doubling of revenue company-wide over the past year, management could have funded the entire endeavor through retained earnings had t he expansion decision been put off for a short period of time (American Superconductor, 2003). This approach would prevent any dilution of share value, any potential loss of autonomy, and would avoid the seemingly unnecessary burden of additional indebtiture at a time when the company is flush with cash. Having made the decision to raise the capital through equity financing, management needs to determine what the cost of equity truly would