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¶ … funds has its own advantages and disadvantages. In that regard therefore, debt financing could in some instances be more appropriate than equity financing. The reverse is true. This text concerns itself with some of the benefits FedEx Corporation would experience were it to raise funds through debt. The text also highlights some of the drawbacks of such a move.
Debt Financing: Focus on FedEx
FedEx, as it points out on its website, "provides customers and businesses worldwide with a brand portfolio of transportation, e-commerce and business services" (FedEx, 2014). As it further points out, it has in the past been ranked amongst some of the most trusted and admired companies in the world (FedEx, 2014). The company's current chief executive officer is Frederick W. Smith.
Costs and Benefits of Debt Financing
To begin with, it is important to note that as Peavler (2010) points out, debt financing could benefit a company as the interest paid on a loan taken by the business is tax-deductible. In this case therefore, should FedEx decide to increase the proportion of its debt (in relation to equity); it would have a portion of its income shielded from taxes....
Next, it is also important to note that unlike is the case with equity financing, the lenders from whom a business borrows money do not have to share in its profits (Peavler, 2014). All businesses have to do as the author further points out is to repay the loan in a timely manner. In that regard, should FedEx embrace debt financing and offer timely repayments, then lenders will not have a direct claim on any of its future earnings.
It should, however, be noted that although debt financing seems appropriate from one perspective, it could be deemed disadvantageous in some other circumstances. To begin with, it should be noted that in taking a debt, FedEx would in effect be betting on its ability to service the debt going forward. This is unlike is the case with equity financing where the company is not obligated to issue dividends when revenues start dwindling. In the words of Seidman (2005, p. 32), "unlike equity, debt must be repaid…" However, a number of things could affect the company's ability to repay a debt. These include but they are not limited to an economic meltdown, loss of key markets, loss of a crucial customer,…
References
FedEx. (2014). About FedEx: Overview and Facts. Retrieved from http://about.van.FedEx.com/FedEx-overview
Peavler, R. (2010). Debt and Equity Financing: The Advantages and Disadvantages of Debt and Equity Financing. Retrieved from http://bizfinance.about.com/od/generalinformatio1/a/debtequityfin.htm
Seidman, K.F. (2005). Economic Development Finance. Thousand Oaks, California: Sage Publications.
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