In this math tutorial video, we will discuss sources of financing namely debt financing and equity financing.
Debt financing can be in the form of borrowings from banks and other leading institutions of debt securities like commercial papers and bonds and here the benefits:
1.Interest expense is tax – deductible
2. It allows the company to grow without diluting the interest of the controlling stockholders
3. Creditors generally do not intervene in the decisions of the management.
Debt financing creates a contractual obligation for the borrower to pay the interest and principal.
Disadvantages
1. Too much debt can expose the company to a bankruptcy
2. Managers tend to fix the debt rather than the operations of the company

On the other hand equity financing refers to the issuance of new shares of stocks and retained earnings plowed back into the operations of the company.
Benefits
1. It does not require any mandatory payment of dividends
2. You can control the company if you have enough shares
3. It provides financial flexibility
Disadvantages
1. Cash dividends are not tax – deductible
2. Offering new shares to other investors may dilute the ownership stake in terms of existing stockholders.
3 It is the most expensive source of financing
a. Most companies opt to have debt financing
b. A company that is in the process of liquidation cannot distribute anything to stockholders unless the claims of the creditors have been satisfied first
c. Borrowers are more assured, cash dividends are not guaranteed
d. If a company does not perform well, the stockholders absorb the losses
#SourcesandUsesofShortandLongTermFunds

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