A new or an existing company may be financed by:
debt only by law
U.S. Treasury bonds
debt and equity and U.S. Treasury bonds
debt and equity
equity only by law
The correct answer and explanation is :
Correct Answer: Debt and Equity
A new or existing company may be financed primarily through debt and equity. These are the two fundamental sources of funding for businesses.
1. Debt Financing
Debt financing involves borrowing money that must be repaid over time with interest. This can come from:
- Bank Loans – Companies borrow money from financial institutions and repay it with interest.
- Corporate Bonds – Businesses issue bonds to investors, essentially borrowing from the public.
- Lines of Credit – Companies can access funds when needed, similar to a credit card.
Debt financing allows companies to retain full ownership while obtaining necessary funds. However, excessive debt can lead to financial strain due to interest payments and repayment obligations.
2. Equity Financing
Equity financing involves raising capital by selling ownership stakes (shares) in the company. Sources include:
- Private Investors – Angel investors and venture capitalists provide funding in exchange for equity.
- Public Offering (IPO) – Companies sell shares to the public on stock exchanges.
- Retained Earnings – Profits reinvested into the business instead of distributing them as dividends.
Unlike debt, equity financing does not require repayment, but it dilutes ownership and control of the company.
Why Not U.S. Treasury Bonds?
U.S. Treasury bonds are issued by the U.S. government to fund federal expenses, not by companies. Businesses cannot issue or finance themselves through these bonds.
Why Not “Debt Only” or “Equity Only” by Law?
There are no laws restricting companies to finance themselves exclusively through debt or equity. Most businesses use a mix of both to optimize financial stability and growth potential.