Topic: Reports

Figure 3

2.2 Tax Implications

Taxation is inevitable and thus a significant influence on the decision of the various financial policies. Debt financing increases the interest rates and further reduces the investments. The implications of debt financing are evident through the reduced capital stock that will subsequently result in lower outputs. (David, Romer 193). Equity financing is one that goes through two levels of taxation with the first one being at the business stage through corporate tax. The second level is at the shareholder's stage whereby the taxes are via capital gains and dividends. The double taxation on equity makes the financing method unattractive to businesses and individuals. On the other hand, lease financing has tax implications on both the lessee and lessor. For example, the impact on the lessee includes allowable lease rentals and deductions of any incidental expenses (Gurusamy148).

Equity financing is exposed to the potential risk of losing ownership of the business especially if it manages to raise a lot of equity capital. Therefore, if an investor has a high stake in the organization, they might try to take over when there are disagreements. Limited growth opportunities is another risk that depends on the arrangements between the investor and business. The growth potential might be limited when the profits are distributed to investors as dividends. The potential risks in debt financing include debt repayment risks, as the company is required to make periodic deposits to the lender. Debts might also limit the organization's ability to acquire additional cash. Furthermore, the lenders will be reluctant to provide money to an over-leveraged business. Lease financing is bound to experience social and environmental risks particularly on fixed assets like machinery. Poor handling of the materials might lead to pollution and compromise workers safety.

Figure 4

Based on the above graph financial outcomes are greatly affected since a majority of the loans are not yet completed regardless of the amount. The advantages of debt financing include tax benefits whereby companies can acquire deductions on tax for every interest paid on debt. Business freedom is another benefit of debt finances as they are flexible since they are obligated to the lender for a specific period. However, the disadvantages of this method are business credit rates are affected when investors want to invest. A company with great amounts of debt is considered risky for investments (Cumming, Douglas 134). Hire purchase arrangements and closed-ended leases that will allow the lessee to become the owner of the asset at the end of the stipulated period characterize finance lease outcomes.

Figure 5

This finance option is beneficial as it allows for balanced cash outflow. Leasing ensures that the payments are consistent throughout the years and hence it is just not a one-time money payment. Appropriate capital usage is another benefit that enables the business save money or fund other better ventures. Nonetheless, lease financing has minimal financial benefits as long-term agreements mean it is fixed based on the agreed period (Khan 101).

Figure 6

The graph above shows calculations on assets and liabilities in the financial outcomes. Equity financing is also advantageous as the investors are always ready to provide impromptu funding when needed. Additionally, the business can explore and initiate creative ideas, as the investors need to see value for their money. Nonetheless, one likely to lose power on the management decisions depending on the investors (Coyle, Brian 6). Equity finance is also time intensive and costly thus taking the management’s focus on the main business activities.

Based on the Plan2go scenario, debt financing will be the appropriate financing approach for the purchase of the bus. According to the description, debt financing will provide low funding rates as compared to equity finance specifically in low-interest periods. The organization's rights in regards to the length of contractual obligations will solely depend on the agreement with the lender. The disposal of assets are kept as collateral, and even when the company declares bankruptcy, the lenders will have higher claims in comparison to shareholders. Termination of a contractual arrangement requires that the money given under the agreement be returned. Breach of contract also warrants termination of the contract in cases whereby either party is not fulfilling their promises. The owner also has the right to specify what assets can be placed as collateral and what the lenders can access during repayment. The lender thus has the right to make claims about certain assets when the business is not able to repay the loan. Finally, both the lender and the business have the responsibility of reporting in the company accounts, the notes payable, any advances and deposits made, accumulated, and retained earnings. Both parties should keep updated records on how the business is progressing to ensure that the debt is paid on time.

Appendices

· Figure 1: Value of Car dealership

· Figure 2: Lease Bubble

· Figure 3: Equity Leasing

· Figure 4: Share of Borrowers that default by year 3

· Figure 5: Operating Lease vs Finance Lease

· Figure 6: Balance Sheet

Debt vs Lease Financing Worksheet