The advantages and disadvantages of debt for capital formation versus equity for capital formation of a corporation

Taxation Advantages of Debt Financing over Equity Financing
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Taxation Advantages of Debt Financing over Equity Financing
Debt financing and equity financing are the two main alternatives for capital structures when beginning a business. In this case, the organization develops technology for various medical facilities and other fields of the medical profession. A review of the impact of taxation of capital structures should involve distinguishing between equity capital structures and debt capital structures. In particular, the concern is in the disadvantages that may emerge out of using one alternative over the other concerning the impact of taxation on the investment plan (Overesch & Voeller, 2010). Under the debt capital structures, the company has the advantage that it can maintain the ownership of its business while it raises money for its investors. An advantage of using debt is the exemptions, such as deductible interests, as long as they can repay the debt in full. On the other hand, equity capital structures involve distributing equities or ownership among investors in exchange for capital. The capital income tax rates are a significant determinant of capital structures, whereby debt capital investments emerge with more tax shields than non-debt capital investments such as equities.
Analysis of debt composition in debt funding relative to equity capital structures suggests how equities are less expensive than debt capital structures. Taxes, for instance, help to distinguish between the role of debt versus equity capital structures in determining the firm’s financial leverage. The significance of tax in capital structures is associated with the relative composition of the debt than the total debt outcome (Marres & Weber, 2012). Taxes on debt capital structures create financial leverage, the formation of tax deductibles and, in particular, through the national interest deduction (NID). The corporate taxation program for a company will largely depend on its capital structures, whereby there are both tax and non-tax benefits of the use of debt capital structures. The main advantage of tax deductibles in debt capital structures is that it reassures investors and has the right bearing on the company’s solvency (Dai & Wang, 2013). For instance, investors understand that they can gain more financial leverage on debts, especially through long term interest repayment plans. Non-tax benefits of debt are that the firm can maintain its profit growth and control over company decisions and strategies.
Another aspect of debt that gives more financial leverage to the firm is the fact that the interests that accrue are tax-deductible. As such, the use of debt capital structures can help reduce the actual cost of capital for the firm due to the tax code that allows the firm interest deductions. As such, with the use of debt, the firm can gain through the tax code provisions that consider interest repayments as deductions to revenues pending taxable income (Korajczyk & Levy, 2003). By allowing for the interest deductions, debt capital structure emerges more favorable than equities. It reduces the taxable income, which creates an opportunity for higher profitability of the in...