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Equity and equity-linked products

Created by : Gandhi Rajan, Sr. Associate, ICICI Securities  | 09 30 2008 21:04:18 +0000
Industry : Investment BankingFunctional Area : Derivatives(Markets)
Keywords : Equity Debt Choose
Activity:  991 views;  last activity : 07 06 2010 20:18:09 +0000

Many people believe they should choose between debt or equity financing for their companies. This is perhaps based on the view that money is money, and it does not matter how you get it. For us as outside equity investors, however, the differences matter a great deal. We want to get the most bang for our buck. So lets get going-


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Debt Vs Equity
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If your company's after-tax cost of debt is lower than the net return on assets then you should go for debt and take on as much as u can and also u can maximize your return on equity if the net profit margins are higher than net interest rates by maximizing debt.

By Alok Kumar Singh, Sr. Associate, UBS  | 10 13 2008 09:32:03 +0000

In order to grow, a company needs to either go into debt, sell a part of the company in order to raise money. So you can either finance that growth by borrowing from the bank, or by issuing bonds. This is called debt financing. So while you own 100% of the company, you owe a lot of money. From an investors point of view, there is a large difference between investing in debt versus investing in equity. By investing in a debt instrument such as a bond, you are guaranteed the principal of the bond, plus any interest that is owing. The biggest advantage of debt financing is that the lending party does not gain any part of ownership of your business and your only obligation to lending party is to repay the debt. Also, repayment of the loan is typically a fixed expense, according the terms of the loan.

By Gandhi Rajan, Sr. Associate, ICICI Securities  | 09 30 2008 21:04:18 +0000

Equity financing is when you (the business owner) sell an ownership interest in your business in exchange for money. The business owner and the investor shares the business and the risks that come with it. Equity financing is a form of financing your business without incurring debt. With equity financing you don't have to take out a loan since the funding is already coming from an investor in exchange for a piece of ownership in the business. The major advantage of equity financing is that the cash flow that would have been used to repay the loan can be used to grow the business.

By Varun Sood, Associate, JP MorganChase  | 09 30 2008 21:05:16 +0000
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