Sia
3275149356's Question
Macroeconomics
Posted 10 months ago
16:47
43
Business Finance - ACFI3203 520 -
EXAM PAPER STARTS HERE
SECTION A - SHORT FORM QUESTION Answer all questions in this section
QUESTION 1: CAPITAL STRUCTURE
Critically discuss various sources of capital (debt vs. equity) that companies can utilise to raise funds for their operations and expansion. Focus on evaluation of the advantages and disadvantages associated with each source of funding, considering the implications for longterm financial sustainability.
(10 marks)
SECTION A TOTAL 10 MARKS
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Answer from Sia
Posted 10 months ago
Answer
Companies can raise funds through debt, equity, or a combination of both, each with its own advantages and disadvantages affecting long-term financial sustainability.
Solution
a
Debt Financing: Companies can issue bonds or take out loans
b
Advantages of Debt: Interest payments are tax-deductible, which can lower the company's taxable income
c
Disadvantages of Debt: Increased financial risk due to fixed interest payments and principal repayment obligations
d
Equity Financing: Companies can issue stocks to raise capital
e
Advantages of Equity: No obligation to repay investors, which can reduce financial risk
f
Disadvantages of Equity: Dilution of ownership and potential loss of control if a large number of shares are issued
g
Long-term Financial Sustainability: A balanced capital structure that optimizes the cost of capital and minimizes financial risk is crucial
Key Concept
Capital Structure
Explanation
The choice between debt and equity financing has significant implications for a company's long-term financial sustainability, with the optimal mix depending on the company's specific circumstances and the cost of capital.
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