If you were the financial manager of an organization and were deciding whether to use debt or equity to fund a project, what factors would influence your decision?

Question

Business

Jabari

1 March, 08:35

If you were the financial manager of an organization and were deciding whether to use debt or equity to fund a project, what factors would influence your decision?

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Answers (1)

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Nia Black · Answer 1

The correct answer is: the costs.

Explanation:

Debt financing is money borrowed to be repaid over a period of time usually as forms of credits or loans from financial institutions such as banks. The benefit of debt financing is that an organization could turn a small amount of money into a large sum. The drawback is that the money borrowed requires payment with interest regardless the organization had revenues or not.

Equity capital is the financing method of a company through stocks. The funds must not be repaid but the organization gives part to its ownership to the investors who profit from dividends.

The cost of equity is higher than the cost of debt because equity financing is a greater risk to the investor since stockholders eventually can take over the ownership of a firm, something that does not happen with debt financing.