Debt & Equity

• What is an important concept for business investment?

  Debt versus equity
• Why is internal finance important for businesses?

  It provides cash for investment and expansion
• What is external finance composed of?

  Debt and equity
• What types of debt are there?

  Short-term debt and long-term debt
• Why is short-term debt seen as inappropriate for investment?

  It usually consists of current liabilities
• What does equity represent in finance?

  All non-debt cash available
• What is share capital?

  Total capital raised from shares
• What are the disadvantages of debt financing?

  • Interest payments reduce net profits
  • Interest rates can change, affecting payments
• What are the disadvantages of equity financing?

  • Issuing shares reduces control
  • Dividends reduce retained profits and net worth
• How do interest payments affect net profits?

  They reduce net profits on the income statement
• What happens when interest rates increase?

  Interest payments on debt become higher
• What is the risk of issuing too much equity?

  You may lose decision-making control
• How do dividends affect retained profits?

  Dividends reduce retained profits
• What is the difference between retained profits and net profits?

  Retained profits are cumulative, net profits are current
• What factors influence the choice between debt and equity financing?

  1. Current interest rates
  2. Existing levels of debt and equity
  3. Urgency of investment or expansion
• How do high interest rates affect financing decisions?

  They make debt more expensive, favoring equity
• Why might a business choose debt for quick investments?

  Debt financing is usually faster to secure
• What is a common practice among businesses regarding financing?

  Most businesses use debt financing
• What are the key considerations when deciding between debt and equity?

  • Interest rates impact cost of debt
  • Existing debt levels affect new borrowing
  • Speed of financing affects investment timing