When a company requires raising capital for new investment, may has two real selections. Option one is to selling equity and option two is to selling debt from financial institutions (Stephen Ross, David Hillier, 2012).
The cost of selling equity is greater than the cost of selling debt because when the firm sells equity to individuals, because company and other investors are selling a part of their future. Investors will be more concerned to the possible growth of the company and dividends they will gathered as different to fixed income. There’s additional growth possible with shares than with debt and equity shareholders …show more content…
A company, either public or private is raised money by selling equity. Different debt the firm must pay at a set amount of interest, equity is not having a set price that the company should pay. Nevertheless this doesn't mean that there is no cost of stock. Equity shareholders assume to gain a certain return on their equity investment in a firm. From the company's viewpoint, the equity holders' compulsory amount of return is a cost, because if the firm does not bring this expected return, stockholders may sell their shares, producing the stock price to drop. The cost of equity is fundamentally what it costs the firm to maintain a share price that is suitable to …show more content…
The cost of equity means having to share the benefits from the investment.
Two types well known of financing for a business is debt and equity financing. Debt financing tends to be the type of financing you receive from a traditional bank loan and equity financing tends to be financing to get from venture capital into the business from external investors.
The value of debt financing is a finite and could pay down the debt through time to a zero sum balance without any more requirements to the lender. The stroke down to debt financing is that traditional lenders that take a hard look at a business including how extended it has been in being, income from operation, expenses and will be required hard assets for collateral for the loan. Moreover, lenders will most indeed want to personally guarantee recompenses of the loan.
Another disadvantage of debt financing will be burdened with some other type of regular payment in the organization depending on the terms and circumstances of the financing and this could absorb serious cash flow, particularly with small