CORPORATE FINANCE

Running head: CORPORATE FINANCE Debt vs. Equity Financing Name: Institution: Course: Tutor: Date: Debt vs. Equity Financing Debt and equity are the two major methods of financing a business. A firm may decide to borrow funds from external lenders or it may decide to obtain funds from the owners of the business or by issuing shares. Debt finance is the external source while business financing from owners of the business is termed as equity financing. Each of these sources has its own pros and cons. Debt equity is preferred because it is believed to increase the value of the firm. This is because interest on debt finance is tax deductible. Therefore, a considerable amount of debt finance is important in the capital structure of a firm (Lewellen & Lewellen, 2005). Though debt equity increases the value of the firm, too much of it in the capital structure of a business is detrimental to investors. A business with too much debt finance would face difficulties in obtaining equity...