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!!~~++MGT 201 - Financial Management GDB No. 2 has been announced DUE DATE: August 8, 2014!!~~++

Graded Discussion Board

Financial Management (MGT201)

Dear Students

This is to inform that Graded Discussion Board (GDB) No. 02 will be opened on 6th August, 2014 for discussion and last date of discussion will be 8th August, 2014.

Topic for Discussion:  

DEBT & EQUITY FINANCING

Learning Objective:

To develop student's understanding about Debt and Equity financing concepts

Learning Outcome:

After attempting this GDB, students will be able to comprehend the idea of Debt and Equity financing.

 

Scenario:

Mr. Zee - finance manager at Star (Pvt.) Limited, since its induction, has always been involved in the company’s important financial decisions. The company’s CEO – Mr. Bee believes in aggressive business moves and tries to chase every market opportunity for earning good profits for the company. Currently, he is considering investment in solar panel manufacturing business as a potential opportunity for the company’s growth.

In a recent board meeting on this matter, Zee shows his agreement on targeting this opportunity; however, he revealed insufficiency of funds with the company to pursue this opportunity.  Bee gave his opinion to arrange equity financing by the company’s sponsors for this project. But, Zee opposed the opinion and went in favor of debt financing.

 

Requirement:

Describe the most appropriate reasons for which Mr. Zee favored debt financing in the board meeting. (Give four reasons - each not more than two lines)

Note:

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Replies to This Discussion

Exactly

to solve t his gdb u must read  advantages of debt financing and aslo explain how its much important as compare to equity finanicg

All the bst.

Debt financing allows you to pay for new buildings, equipment and other assets used to grow your business before you earn the necessary funds. This can be a great way to pursue an aggressive growth strategy, especially if you have access to low interest rates. Closely related is the advantage of paying off your debt in installments over a period of time. Relative to equity financing, you also benefit by not relinquishing any ownership or control of the business.

COPY PASTE :p

farq nhi prta..its just for taking ideas..

Debt financing is also borrowing against future earnings. This means that instead of using all future profits to grow the business or to pay owners, you have to allocate a portion to debt payments.

Excellent tip. A very plus point about debt financing.

i m am new at V.U plz help to solve thiz GDB

MGT 201 - Financial Management GDB No. 2 has been announced DUE DATE: August 8, 2014

IDEA SOLUTION
simply debit financing k 5 benefits likhnay hain as compare to equity financing 

No intervention in company decisions by debtors while share holder do

2. it is very lengthy and documens working for issue of shares issueng

3:in debit financing at maturity date debit is ended while in equity company has to pay dividen for ever

4: in debit financing the ownership of the company is always with owner but in equity financing ownership is shifted to share holders

we just only have to writte down the advantages of debt financing that why the companies prefer debt or financial leverage in the capital structure what are the consequences of debt financing simply we can say that debt financing provedes us the tax shelter because interest payments are deduct before the taxes paid so the real interest rate is lower than we pay by interest rate(1- tax rate) if interest rate is 10% and tax rate is 30% then we do not pay 10% rate rather we pay 10% (1-0.3) = 7% 
similarly we do not give the control to the outsider to over the management by using debt financing similarly u can find out the many more advantage this is only idea to clear the gdb.

Aren't the words "Debt" and "Debit" two separate things? Debt in my opinion is a kind of borrowing while debit is the name for a type of accounting entry. I think these two should not be used interchangeably. Am I right?

Debt Financing

Debt financing involves borrowing money, typically in the form of a loan from a bank or other financial institution or from commercial finance companies, to fund your business.

Loans generally requires good credit and solid financials, as well as collateral for larger loans.

Many small business owners are afraid to take on debt because they fear they may not have the cash flow to repay the debt (plus interest) in a timely fashion.

Others may be concerned that they don’t have the credit-worthiness to get a bank loan, and so don’t want to even bother applying.

But debt financing has some definite advantages that make it an option worth considering for any small business owner.

First and foremost, unlike with equity financing, debt financing allows you to retain control of your business, as ownership stays fully in your hands.

You may have to back up a loan with collateral, so if you default you may lose certain tangible assets, but you won’t lose creative and strategic control of your business.

In addition, taking on debt can build your business credit, which is good for future borrowing and for insurance rates.

It’s also worth bearing in mind that interest paid on loans is tax deductible, softening the blow of repayment somewhat.

 

Equity Financing

Equity financing involves bringing in investors or partners who provide capital in exchange for a share of ownership of the business.

These investors or partners generally invest because they expect to make a profit when the business becomes successful.

Unlike a loan, if you don’t make a profit, you usually aren’t required to pay them back. The absence of monthly loan payments can free up significant working capital for the business.

Many small business owners also are drawn to equity financing because, while investors or partners will only provide equity if they have faith in the earning power of your business, you don’t necessarily need the pristine financial history that is required for a loan.

This can be a crucial point for many small business owners, especially for those just starting a business without the two or three years of financials most banks look at.

The cost of these benefits is that you no longer retain sole control of your business.

This means that not only will your investors be entitled to a share of profits, but they also have a say in the running of your business and the direction it’s headed.

This may not seem like a problem at the beginning when you need cash, but can sometimes lead to conflict further down the road.

On the other hand, a strong, smart partner may be an asset to your business; especially if you find someone who is a good compliment to yourself.

If you’re the creative, visionary type, you may benefit from the balancing influence of a partner who is grounded and pennywise.

Mgt-201 Gdb Solution by Moin Meera According to my point of view following are the main reasons for which Mr. Zee favored debt financing in the board meeting 1- Debt financing be liable to be less expensive for small businesses over the long term, though more expensive over the short term, than equity financing. 2- Debt financing is that it provides small business owners with a greater degree of financial freedom than equity financing.
3- Debt financing allows paying for new buildings, tools and other assets used to grow your business before you earn the necessary funds.
4- The business relationship ends once the money is pay backed and the interest on the loan is tax deductable.

some positive points regarding Debt Financing:

  • Because the lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company.
  • A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no direct claim on future profits of the business. If the company is successful, the owners reap a larger portion of the rewards than they would if they had sold stock in the company to investors in order to finance the growth.
  • Except in the case of variable rate loans, principal and interest obligations are known amounts which can be forecasted and planned for.
  • Interest on the debt can be deducted on the company's tax return, lowering the actual cost of the loan to the company.
  • Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations.
  • The company is not required to send periodic mailings to large numbers of investors, hold periodic meetings of shareholders, and seek the vote of shareholders before taking certain actions.

 

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