Debt financing or equity?
In theory, the more money borrowed to finance the entrepreneur, the more equity return it (leverage effect). At least, if the return on total assets is higher than the kredietvergoeding. If not, then turn the lever the other way round.
On the equity provider receives a profit-linked compensation in the form of interim dividend payments and appreciation of the shares. In the event of bankruptcy may have destroyed entire investment.
Dividends are not tax deductible by the company.
The remuneration for outside funds is independent of the company to achieve results.
The providers of debt trying to minimize their risk by establishing a mortgage on the BV of assets or funds of the private entrepreneur. In the event of bankruptcy, the collateral is overcome making (part of) the financing is secured.
Interest is normally tax deductible to the lending company.
If the return on total invested capital tax is higher than the interest on debt must be paid, that is great. As more is financed with debt, there remains more profit for the return on equity. This is called leverage.
But debt financing is not possible indefinitely. The funders require a certain amount of risk capital in the company is present that acts as a buffer capacity or stamina. This buffer capacity is sufficient to provide security to disappointing company results still to meet the financial obligations and the progress of the company as much as possible.
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