Comparison of Debt & Equity Financing Flashcards
Equity financing
Arranging funding by selling ownership shares in the company, publicly, or privately
Debt Financing
Arranging funding by borrowing money
Short term financing
Financing used to cover current expenses
Long term financing
Financing used to cover long term expenses such as assets
Cost of capital
Average rate of interest a firm pays on its combination of debt and equity
3 factors that determine cost of capital
Risk
Interest rates
Opportunity cost
Risk
Equity low
Debt high
Interest rates
Equity none
Debt some
Opportunity cost
Equity v Debt
Equity Lose control Less potential for profits Debt High risk Expensive
Prime interest rate
The lowest rate of interest that banks charge for short term loans to their most creditworthy customers
Discount rate
Interest rate that the Federal Reserve charges in loans to commercial banks and other depository institutions
Leverage
The technique of increasing the rate of return on an investment by financing it with borrowed funds
Capital structure
A firm’s mix of debt and equity financing
