Two Types of Financing

Equity and debt are the two sources of financing accessible in capital markets. The term capital structure refers to the overall composition of a company's funding. Alterations to capital structure can impact the cost of capital, the 澳洲幸运5官方开奖结果体彩网:net income, the 澳洲幸运5官方开奖结果体彩网:leverage ratios, and the liabilities of publicly traded firms.

The 澳洲幸运5官方开奖结果🍷体彩网:weighted average cost of capital (WACC) measures the total cost of capital to a firm. Assuming that the 澳洲幸运5官方开奖结果体彩网:cost of debt is not equal to the 澳洲幸运5官方开奖结果体彩网:cost of equity capital, the WACC is altered by a change in capital structure. The cost of equity is typically higher than th🐻e cost of debt, so increasing equity financing usually increases WACC.

Equity Financing

澳洲幸运5官方开奖结果体彩网:Equity financing – raising money by selling new shares of stock – has no impact on a firm's profitability, but it can dilute existing shareholders' holdings because the company's net income is divided among a larger number of shares. When a company raises funds through equity financing, there is a positive item in the 澳🐻洲幸🌳运5官方开奖结果体彩网:cash flows from financing activities section and an increase of common stock at 澳洲幸运5官方开奖结果体彩网:par value on the balance sheet.

Debt Financing

If a firm raises funds through 澳洲幸运5官方开奖结果体彩网:debt financing, there is a positive item in the financing section of the 澳洲幸运5官方开奖结果体彩网:cash flow statement as well as an increase in liabilities on the balance sheet. Debt financing includes principal, which must be repaid to lenders or bondholders, and interest. While debt does not dilute ownership, interest payments on debt reduce net income and cash flow. This reduction in net income also represents a 澳洲幸运5官方开奖结果体彩网:tax benefit through the lower 澳洲幸运5官方开奖结果体彩网:taxable income. Increasing debt causes leverage ratios such as 澳洲幸运5官方开奖结果体彩网:debt-to-equity and 澳洲幸运5官方开奖结果体彩网:debt-to-total capital to rise. Debt financing often comes with 澳洲幸运5官方开奖结果体彩网:covenants, meaning that a firm must meet certain interest coverage and debt-level requirements. In the even𝄹t of a company's liquidation, debt holders are senior to equity holders.