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PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

PEMBELANJAAN PEMBELANJAAN PERUSAHAANPERUSAHAAN

LECTURE 5b – THE LECTURE 5b – THE FINANCING PROCESSFINANCING PROCESS

PP/MB-IPB/TA/10 22

DEBT vs EQUITYDEBT vs EQUITY

Fixed ClaimHigh Priority on CFTax DeductibleFixed MaturiyNo Management Control

Residual ClaimLowest Priority on CFNot Tax DeductibleInfinite LifeManagement Control

Debt EquityHybrids(Combinations D & E)

External Financing Internal Financing

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The ChoicesThe ChoicesEquity can take different forms:Equity can take different forms: Owners investing their savings : Very small Owners investing their savings : Very small

businessesbusinesses Venture capital : Slightly larger businessesVenture capital : Slightly larger businesses Common Stock : Publicly traded firmsCommon Stock : Publicly traded firms

Debt can also take different forms:Debt can also take different forms: Bank Loans : Private businessesBank Loans : Private businesses Bonds: Publicly traded firmsBonds: Publicly traded firms

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DISADVANTAGES OF DISADVANTAGES OF EXTERNAL FINANCING EXTERNAL FINANCING

OPTIONSOPTIONSPRIVATE FIRMS:PRIVATE FIRMS:

Difficult to raiseDifficult to raise

Loss of control and flexibilityLoss of control and flexibility

PUBLICLY TRADED FIRMS:PUBLICLY TRADED FIRMS:

Expensive (issuance cost Expensive (issuance cost new equity) new equity)

Lost flexibility (new debt)Lost flexibility (new debt)

PP/MB-IPB/TA/10

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