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.....debt and equity has a number of different implications, including some significant tax implications. Debt is repaid from earnings prior to taxation, where equity payouts typically occur on an after-tax basis. This is because debt repayments take priority over the payment of dividends or even to stock buybacks or retained earnings. Debt capital is thus repaid before the company is taxed -- debt lowers taxable income. Thus, debt will also lower the total tax burden that the company faces (FindLaw, 2017).If the company opts for equity financing, it will face a higher tax burden. The taxable income will be higher, which means that the total tax payable will also be higher. Then, the equity that flows to shareholders will do so on an after-tax basis. The shareholders of course will also pay tax on whatever flows they receive. For the corporation, even though it doesn't pay that tax, it is still affected by it, because it means that equity capital has a higher cost of capital than debt. When weighing capital structure decisions, cost of debt is one of the considerations that senior management needs to take into account, because a higher cost...
This makes sense for a company on a positive growth trajectory, but has its own challenges should the company no longer be growing.
If the company chooses debt, however, it must make the repayments on schedule, and that includes the interest payments. Debt may have a lower cost to it than equity, but it creates more of an immediate burden on the company's cash flow. The upside is the reduction in tax, but if the company was not going to be taxed anyway this would be a strong negative factor. Further, the more debt that the company has, the riskier it becomes because of that cash flow burden, and thus the higher it will pay on subsequent debt (FindLaw, 2017).
2. The company is a young organization, almost assuredly with upside. Without having a sense, however, of how the expected orders will turn to profit, it is difficult to fully advise on the tax implications of capital structure. If the company expects to turn a profit, some debt will help to minimize the cost of capital and the tax burden. That said, any debt that the company is able to secure will likely…
" (Small-business financing: Debt vs. equity) Venture capital is a better route than an initial public offering for an early stage startup such as Active Reasoning that lacks the size and stability required for becoming a public company. By taking on equity financing, the company's executives are well aware that they will be giving away partial ownership of the business in exchange for money and that this will have a significant
LEASING vs. PURCHASING COMPUTER EQUIPMENT? Leasing and Purchasing Computer Equipment Scope Considerations for Lease Option 7-9 Advantages of Financial Leasing 9-12 GE Transportation plans to replace their computer equipment for the Human Resources and recruitment department having roughly 100 employees. This paper is based on researching what is the most economical way for the employer, GE, to outfit its office with computer. In this paper the pros and cons both of buying new equipment
Ford vs. GM The author of this report is asked to compare two companies from the same industry. For the purposes of this report, those two companies shall be Ford and General Motors. A one page treatise will be offered for each company giving the history and performance of the two firms over time. Three years of financial data will be offered for each company including financial ratio data. Finally, a
While the first chapter was brief, it is important to explain what will be studied and then move forward into the literature review. In Chapter 2, the literature review provides a review of academic literature by way of journals and textbooks. This information is placed into separate sections which allow for ease of understanding. An introduction is made to capital structure, and information is given on the Indian capital structure
S. Legal, 2008). This is primarily due to the fact that unlike equity issues, they do not dilute shareholder's equity or suppress share price. Debt issues are typically conducted with financial institutions only, rather than the markets. However, debt issues have several disadvantages. Debt is an obligation that must be paid. The obligation is both short-term (interest payments) and long-term (principle repayment). However, the payment of this obligation is tax-deductible,
International Accounting Undergraduate degree Accounting & Finance 1. The Assignment "Several organisations involved efforts harmonise accounting practices rregionally internationally. The important players effort European Union (regionally) International Accounting Standards Committee (IASC) ( IASB) (internationally). There have been a series of efforts during recent years with the aim of developing a common agenda of accounting standards. The fact that there are several alternatives of accounting practices, for example, contributes to making it