1. Financing a Business Two Sources of Cash Debt Equity Commercial Loans
Bonds
Leasing
Trade Credit
Equity
Personal Savings
Private Investors
Venture Capitalist
Stocks
Retained Earnings

2. Debt Financing
Commercial Loans
Bonds
Leasing
Trade Credit

3. Equity Financing Personal Savings Private Investors Venture Capitalist
Stocks
Retained Earnings

4. Stocks Common Stock Preferred Stock Options No fixed maturity
No obligation of payment of dividends
Right to vote for the directors
Preferred Stock
An obligation to receive dividends
Convertible to Common Stock
Options
Strike price = stock price on date option is granted
A claim on the Equity ownership that will dilute the ownership position.

5. Which Is Best? Risk Costs Control of the Company
Debt more risky than Equity
Costs
Equity is more costly than debt financing
Publicly-traded companies have higher costs associated with complying with accounting regulations.
Control of the Company
Equity financing usually requires giving up some management control of the business.

6. Debt Leverage Long-term Debt to Total Capitalization
Long-term Debt to Total Capitalization = Non-current liabilities
Total Capitalization
Total Capitalization = Long-term Debt + Owners’ Equity
Highly (Debt) Leveraged companies will have wider swings in Earnings Per Share (EPS)
Fewer owners to share the wealth when business is good
Interest payment have a bigger effect on Net Income when business is poor