Strategic Finance

Running Head : STRATEGIC FINANCE

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Companies usually require large amount of funds to finance its operations . A company may lack enough finance internally to fund its programmes , especially when it is expanding (Eisenhardt Zbaracki , 1992 17 . These companies results into raising funds either through borrowing from lenders /invertors or issuing equity capital stock to investors External source of financing are general classified as debt financing and equity financing . Debt financing is a financing strategy that involves borrowing funds from investors which are repaid

with interest (Ibid 1992 17 . Equity financing involves raising funds through issuing shares to investors who in exchange receives partial ownership of the company . Debt instruments holders and equity capital holders compose the capital holders of the company . Each financing option has cost to a company . A company must pay interest for the debt borrowed . Share holders also receives regular divided from earnings of the company they own (Eisenhardt Zbaracki , 1992 19 .There are various methods of debt financing which include regular loan , structured loans , debenture corporate bonds and leveraged buyouts

Advantages of debt financing are debt financing has lower issuing cost than equity financing . A company issuing shares in primary market incurs high floatation cost and other related cost like publishing prospectus and advertising (Eisenhardt Zbaracki , 1992 20 . Debt financing do not require these floatation expenses . Debt financing gives tax saving from interest payments . Interest paid by a levered firm reduces the earning before tax this in turn reduces tax liability of...