DEBT & EQUITY

Discussion on Debt & Equity Financing

Discussion on Debt & Equity Financing

Introduction

Companies need capital to carry out their every day operations. They also need capital if they decide to expand their current operations. Raising capital or finance is not an easy task as it involves complex decision making processes. We can broadly divide the choices of raising capital into two different ways, either by issuing more debt or by issuing more equity. Companies employ a mix of both debt and equity to raise finance and fund their operations or expansions (Opler et.al, 2001).. The percentage raised through each is a key factor. Depending on the industry a company operates and some other relevant factors, companies decide to raise debt or equity in a certain percentage. As far as debt-to-equity ratio is concerned, it is one ratio which is widely used all over the world to describe the relationship between a percentage of debt or equity raised by a company.

As a normal practice, companies which are more capital-intensive often employ a higher debt-to-equity ratio. This is because capital-intensive companies often have more stable operations and higher degree of brand loyalty for the products or services they offer. The inelastic demand they have for their products or services help them to raise more debt without causing a concern regarding paying back their obligations. Companies which have lower debt-to-equity ratio don't enjoy this luxury and are often found to have an inelastic demand for their products or services. Their operations are not that stable and face a high degree of systematic factor

As it is often difficult to fully describe the relationship between raising debt or equity and the reasons behind your choice, we will use examples of two real-life non-financial companies currently listed at London Stock Exchange to help our understanding. We will also critically discuss the purpose, advantages and disadvantages of both debt and equity financing. The benefits behind each type of financing, along with real-life examples of the companies will make it easier for us to muster all the issues and provide a clear and concise understanding of debt and equity financing.

As far as our choice of companies to describe debt and equity financing is concerned, we have selected two companies which are listed on London Stock Exchange. Both of them are operating in different industries. We have selected Air China Limited, an international airline company and flag carrier of China. Airline companies are traditionally capital-intensive and possess high debt-equity ratios. For our choice of the second company, we have selected Microsoft Inc., another international company working in the software industry. Both are non-financial companies currently listed on the London Stock Exchange.

Equity Financing

Description & Purpose

Investors invest their money in companies in exchange for an ownership in the business. Through this, companies can raise finance from the investors by giving them a control and ownership in the business in proportion to the amount invested. This way of raising finance is known as 'equity ...