Professional Documents
Culture Documents
Lecture 7
Capital formation
Sources of Finance: A firm can seek to raise needed capital through borrowing money (debt), selling ownership ( equity), or earning profits (retained earnings). The Main Sources: Owners Equity/Equity Financing Debt Equity/Debt Financing
Sources of Finance
Equity Financing: Is the funds raised from operations within the firm or through the sale of ownership in the firm. Advantages of Equity Financing: No fixed charge Ease of raising for establishing a new business Control in owner s hand Less chance of magnifying the losses
Sources of Finance
Disadvantages of Equity Financing: Many legal restrictions to raise More taxes High return to owners in the shape of dividends Less flexibility Debt Financing: Is funds raised through various forms of borrowing that must be repaid. Advantages of Debt Financing: Less taxes
Sources of Finance
Advantages of Debt Financing: Less Return More flexible Disadvantages of Debt Financing: Fixed charge Difficult to raise for new business More chances of magnifying of losses Less control on policies