Please join StudyMode to read the full document. The more capital the organization has invested in its business the easier it is to obtain financing. An organization should increase stockholder capital for additional capital, if it has a high portion of debt to equity , so that it does not overextend itself and risk the business going under. What is Debt Financing? Debt financing is defined borrowing capital from external investors with an agreement to pay back with interest at a certain time. Debentures are custom in raising additional funding debt offering for organizational operations or expenditures.
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.
Debt finance is frequently cheaper than equity finance. This is for the reason that debt finance is safer from a lender's standpoint. Interest has to be paid ahead of surplus. When it came to liquidation, debt finance is compensated off ahead of equity. This makes debt a safer investment than equity and consequently debt shareholders require a lower rate of return than equity shareholders.