Equity and Debt Essay Example | Topics and Well Written Essays - 750 words

Equity and Debt - Essay ExampleHowever, this is balanced by the requirements of the debt covenant to regularly service that debt that is, the corporation regularly needs to make payments to the issuer of the debt to cover the principle they borrowed and the interest required by the debt covenant. This detriment is take outset in some regard through the step-down in tax liability (Seidman, 2005) in short, the payment of debt reduces the amount of income that the company is taxed upon. Equity financial backing carries with it its own distinct set of advantages and disadvantages. Chief among the advantages of equity financing is the existence of no repayment period of the capital used to expand the business (Seidman, 2005). Since the capital is raised through individuals or businesses buying a piece of land of both the company and its future earnings, the rewards for providing the capital come through an expected increase in the value of their investment. This, however, translates into a disadvantage of equity financing. Namely, while shekels are expected to increase, the pie is now being divided into more pieces, thus reducing the value of the existing stakes. Further, with the issuance (or release) of additional stock into the market to stand-in an equity financing endeavor, the company becomes more susceptible to outside influences, whether through potential takeovers or through some loss of control of the decision-making process (Seidman, 2005). I neither fully agree nor fully disagree with managements decision to proceed with equity financing instead of the intended debt financing in the expansion of their manufacturing capabilities. Equity financing makes sense, especially in light of the 305% rise in the companys stock price over the past stratum (American Superconductor, 2003). Management is able to take advantage of the ability to raise capital with less dilution of current stockholders shares than would otherwise be expected in an environment of stalls share price. Debt financing, too, makes sense in regard to the fact that with the government project becoming profitable a quarter ahead of expectations and with the massive savings in operating expenses, debt financing would conduct been rather easy to service (American Superconductor, 2003). Using that approach, no dilution of stockholder value would be necessary and there would be no potential for a loss of corporate autonomy. Further, with an eye again to lower future operating costs and an unexpectedly profitable revenue stream, debt financing would have lowered the potential future tax pith that the company will soon be faced with. Instead of management undertaking either approach, I believe that a third option would be best. With the companys results that lent themselves to support debt financing as well as a nigh doubling of revenue company-wide over the past year, management could have funded the entire endeavor through retained earnings had the expansion decisi on been put off for a short period of time (American Superconductor, 2003). This approach would prevent any dilution of share value, any potential loss of autonomy, and would avoid the seemingly unnecessary burden of additional indebtiture at a time when the company is flush with cash. Having made the decision to raise the capital through equity financing, management needs to coif what the cost of equity truly would