Debt vs Equity Paper

Submitted By Flick2013
Words: 464
Pages: 2

Debt versus Equity Finance Paper

The following paper will contrast lease versus purchase options defining debt and equity financing options. Additionally the paper will provide examples of these options and the advantages as to why companies decide to choose one option over the other, or decide to use a mix of both in their capital structure.
Debt Financing
Companies incur in debt financing when they need to raise capital by borrowing money from a lending institution such as banks and other sources of lending capital. Most common examples of debt instruments are bonds, line of credit, real estate mortgages, and Small Business Administration loans (SBA). Bonds are promissory notes issue to lenders with maturities of ten years (long-term) and usually carry an interest. A line of credit could be a short-term financing option to be repaid in one year or less. It could be used to finance inventories or payroll, while long-term debt instruments are mostly used to buy property, plant, and equipment.
Equity Financing
This is an additional way to raise capital for a firm. Companies sell ownership of the firm by issuing bonds to be sold to investors. These investors (bondholders) are the owners of the company. These investors could take an active role within the firm and have the power to vote and other important decisions for the firm. These shares could be transferred to other parties (transfer of ownership). Examples of equity financing are common stocks and preferred stocks. Common stocks give the ownership of a firm and entitle the shareholder to receive dividends. Preferred stocks provide ownership and preference over common stockholders in the repartition of dividends; however; these shareholders have no voting rights.
Lease versus purchase options
When a company is deciding whether to lease or