TRANSPARENCY MASTER 8-1

EQUITY FINANCING VS. DEBT FINANCING
Equity
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Debt
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Represents an ownership in the company. Payment of dividends to shareholders is usually optional. Dividends paid on shares of stock are not tax deductible. Issuance of stock maintains a lower debt/equity ratio for the corporation. Issuance of equity securities may dilute the current shareholder’s control over the corporation. Shareholders are entitled to dividends only from the profits of the corporation (if any).

Represents a loan of capital to the company that must be repaid. Periodic payment of fixed interest to debt holders is usually mandatory. Interest paid on debt financing is tax deductible. Too high a debt/equity ratio in a corporation increases the likelihood of insolvency. Incurring debt financing usually does not affect the current shareholders’ control over the corporation. Interest on debt is an expense that must be paid before profits can be calculated or dividends paid.

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FIGURE 8-5 Equity Financing vs. Debt Financing

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TRANSPARENCY MASTER 8-2 PAYMENT OF CORPORATE DIVIDENDS FIGURE 8-4 Payment of Corporate Dividends 176 .

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