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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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