Principles of Finance: Equity and Debt

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Among the various responsibilities of the manager is to be able to make sure that the business operations are working according to the policies they lay down. It is therefore their responsibility to make sure that there is adequate financing whenever there is that need in their business. The managers have to first consider the benefits that come with financing on the various financing option they have available to them. Among the main ways of financing the operation of the business available to the managers are getting a debt or encouraging the shareholders to provide more capital and increase their investment in the organization (Seidman, 2005).

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The decision by AMSC to encourage the shareholders to increase their investment through shareholders equity has various benefits to the business. For one, the shareholders are encouraged to have more interest in the business since they have more to lose in case the business fails. Such is of benefit to the business as the shareholders get to only make the right decisions that are of benefit to the business (Peavler, 2011). Another benefit that comes with equity financing instead of investing more in debt financing is the availability of equity financing to debt financing. The meaning of this is that at times, the organization may not be doing so well to attract investors to invest in it and such means that the most available way to enable the continuation of business activities is through the owners of the business, in this case, the shareholders. There is also the issue of the motive of investing in the business (Altman, 1998). Debt financiers invest only where there is the benefit that they have security on their finances which means that in case there is not enough security for the debt financiers there is little likelihood to invest in the business. On the other hand, the equity investors of the business are always willing to invest in the business whenever a good idea comes in. Therefore there is the assurance that there will be the financing of good ideas in the business by the shareholders which is not the case for debt financiers.

Though there are various benefits that come with investing in equity financiers, there are also various disadvantages that come with investing in it. One of them is the fact that the business does not have the responsibility to pay back the money they have borrowed. At times this may be risky to the equity financiers as they may not get the return on the investments or if they do it might take longer to do so. Such is not pleasant to investors they expect to get their return on investment in the shortest time possible. AMSC may also be forced to increase their management time and ensure that they proved information that the equity investors may need before they commit their funds to the manager’s proposals. The occurrence of such a scenario may be due to the fact that the shareholders may not always be comfortable with committing more funds to the business. When encouraging investment in the business, there is usually occurrence of legal and regulatory issues, the case is similar when it comes to financing using equity. Some of these issues are not always of benefit to the business especially when it comes to the promotion of the investment.

The decision by AMSC to ensure get finances to run the business from the shareholders was a good decision. The reasoning behind this is backed by the fact that there are more benefits that come with investing through the shareholders. There is also the availability of the finances since the shareholders are usually likely to support the good decision that may lead to the company moving to great heights. Determination of the cost of equity is dependent on several factors. To start with the cost of equity is the financial benefit and investors enjoy due to the risk the investor takes in investing in a certain investment (Richards, 2010). An investor of AMSC needs to enjoy the profits that may be realized due to the investment in the company. Determination of the cost of equity is done by dividing the dividend per share by the current market price of the stock. The resultant of this is then added to the rated cat which the dividends of the company are growing.

Investing in debt financing has also considerable benefits that are desirable for the company. Among them is the fact that there is a tax deduction on both the principal and the interest charged on this capital. Both of them can be treated as a business expense and are therefore deducted when computing the tax charges for the year. In turn, the business, therefore, has a lesser taxable income for the year (Rosen, 2005).

The decision by AMSC management to promote equity financing was a good decision. The decision is notable of benefits as it reduced risky incidences like reducing taking over of the business by creditors of running the business to such a point that it may face bankruptcy. However, it is notable that the business may also benefit from dent finances. Such can be due to the fact that the tax is usually lesser than when financing using the shareholders.

References

Altman, E. I. ( 1998). The High-Yield Debt Market: Investment Performance and Economic Impact. New York: Beard Books,.

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Peavler, R. (2011). The Advantages and Disadvantages of Debt and Equity Financing. Web.

Richards, D. (2010). Managed well, it can be an effective vehicle to help grow your business. Web.

Rosen, H. S. (2005). Public finance. Belgian: The McGraw-Hill Companies, Inc.

Seidman, K. F. (2005). Economic development finance. London: SAGE.

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