Similarities And Differences Of Debt Equity

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In addition to the similarities and differences of preferred/common stock, there is also several offerings that can be done. Common stocks can be privately owned (owned by single individual), closely owned (owned by a small group of investors) or publically owned (owned by various individuals or institution of no relation). There are also different options that can be included in the agreement to essentially protect the investment that is being made because the last thing anyone wants is to lose their percentage of ownership when new shares are issued. These are known as pre-emptive rights (Investopedia/Pre-emptive rights, 2016).
Issuing common stock is not the easiest thing to do. There are certain steps that need to be taken beforehand
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For instance, debt financing has a stated maturity date where equity financing does not. Debt financing does not allow a “voice in management (Gitman, 2009)” where equity financing does. Debt financing allows the interest paid out to be a tax deduction where equity financing does not and debt financing has first claim on all income and assets in the event that a company goes bankrupt (Gitman, 2009). What this means is, they are paid first… and IF there is anything left over, then equity owners may re-cooperate some loses. However, debt holders have no ownership in the company and once a debt vehicle is purchased, the contractual limitation are set. Equity holders have the chance to earn more than their investment because it is dependent on the share price for the company’s stock… and vice versa. This is why the risk is greater for the equity holders and therefore a risk premium is offered. Lastly, equity financing trades making scheduled interest payments on monies borrowed (which are tax deductible) for making scheduled dividend payments (which are not tax …show more content…
This is actually the second location he opened after having a very successful first location for several years. He started the business with his father over 50 years ago and eventually expanded his operations to include an eat-in area (which required waitresses and a menu) and a catering service. The start-up costs for this location were approximately $125,000. The money was raised through friends, family and suppliers (that currently deliver to his first location). There was no interest owed to these individuals… just a handshake a promise to repay, which he did within 2 years of this 2nd location being open. His rent is $6500/month, utilities are $4900 ($4000 electric, $900 gas), overhead is $45,000/yr., and payroll costs are $2500/wk. for 50 employees. He states that his perishable goods last 1-2 weeks and his paper goods about a month. He runs through approximately $80,000 worth of inventory every month and has a target of $80,000-$90000 in gross sales every month. The biggest obstacles he has to overcome every year are the lulls in business. He stated that the holidays play a great deal in this business, bad weather affects it terribly as the winter months (after the holidays at the end of the year) are the slowest. His busiest holiday is Yam Kippur. He can make, in just 1 day of catering for this holiday, what he makes in 2 weeks of in store business. Just to give a better idea of the decrease in business

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