Financing your expansion
A corporation in the retail sector must raise cash to finance the opening of 5 new stores. The company has no debt. As the financial manager of the corporation, would you choose to finance your expansion through debt or through equity? Explain your choice.
Sample Answer
As the financial manager of a retail corporation with no debt, I would choose to finance the opening of 5 new stores through equity. Here are my reasons:
- Lower risk: Equity financing is generally considered to be less risky than debt financing. This is because equity investors do not have a claim on the company’s assets in the event of bankruptcy.
- More flexibility: Equity financing gives the company more flexibility in how it uses the funds. For example, the company can use the funds to open new stores, expand existing stores, or invest in new products or services.
- Tax advantages: Equity financing is generally more tax-efficient than debt financing. This is because the company can deduct dividend payments to equity investors from its taxable income.