#4953 - Equity Vs Debt - Business Law and Practice

Equity vs Debt 1) Existing capital structure Equity 1) Total shareholder funds / share capital in balance will increase 2) Gearing will decrease 3) Company more attractive to lending banks as risk of inability to meet its interest payments is reduced 4) Company more likely therefore to get lower interest rates in the future when borrows Debt 1) Will increase the amount of creditors due to be repaid in one year on the balance sheet 2) Gearing is increased. This will be risky if the company goes through a difficult period 3) Company less attractive to lending banks in the future as bank may require earlier loans to be repaid or extra security to be granted for the loan 4) Company more likely therefore to higher lower interest rates in the future when borrows 5) Would make it difficult for the company to quickly raise debt finance in the future 2) Costs of funding the finance Equity 1) Dividends only payable if declared 2) Dividends are not tax deductible Debt 1) Interest will be due on the loan irrespective of whether the company has money to pay it 2) If interest rates are low, is cheaper than equity 3) Interest payments are tax deductible from corporation tax and therefore advantageous