for a creditor to lend money. Also with excessive debt, a business could have problems with business downturns, credit shortages, or interest rate increases. "Conversely, too much equity financing can indicate that you are not making the most productive use of your capital; the capital is not being used advantageously as leverage for obtaining cash" (Financing Basics, 1). A low amount of equity shows that the owners are not committed to their own business. They do not want to make the important decisions that could have a big and lasting effect on their own. Now I will discuss the pros and cons of the alternative decision, which is a combination of the debt and equity methods. A positive of this method is that the instrument is split between debt and equity. The company could just split it up 50/50 between the two methods. Also if they had too much debt, they could account for the instrument with 20% as debt and 80% as equity. This would make it look as if they do not have too much debt or too much equity. This method would be an advantage, if the company were looking to get more financing in the future.A negative aspect of this method is how the instrument is split between debt and equity. An example would be if the company split an instrument 50/50 between the two methods. This may seem fair when first accounting for it, but what if the split did not represent the actual split of the instrument. Let's say that it turns out that 90% of the instrument ends up being equity, and 10% ends up debt. The books would be off by quite a bit, and creditors my not be happy with the company when they learn of this. Now that I have discussed pros and cons of each method, I will now explain the instrument that I will be using as an example. I will be using stock options as the instrument. Stock options are offered by many businesses to employees that stay with the company for a specified length of time. It is offered by the company ...
