Distinguish between debt financing and equity financing and give one pro and con of each.

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Multiple Choice

Distinguish between debt financing and equity financing and give one pro and con of each.

Debt financing vs equity financing centers on who owns part of the business and who pays for the capital. Equity financing raises money by selling ownership to investors, so you don’t have to repay fixed amounts to them. The choice highlights this by stating that equity financing sells ownership, with the pro that there are no fixed repayments and the con that ownership is diluted. This captures the main trade-off: you avoid debt service but share control and profits with new owners. In contrast, debt financing would involve fixed repayments (and interest) and would not dilute ownership, but it can put pressure on cash flow and introduce default risk.

Debt financing vs equity financing centers on who owns part of the business and who pays for the capital. Equity financing raises money by selling ownership to investors, so you don’t have to repay fixed amounts to them. The choice highlights this by stating that equity financing sells ownership, with the pro that there are no fixed repayments and the con that ownership is diluted. This captures the main trade-off: you avoid debt service but share control and profits with new owners. In contrast, debt financing would involve fixed repayments (and interest) and would not dilute ownership, but it can put pressure on cash flow and introduce default risk.

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