Question

given the need for external sources of capital, compare and contrast the advantages and disadvantages of a external equity, a long term note payable, and a short term line of credit

Answer 1

In external equity, there is no payment obligation as equity shares are unit of ownership in the company. They are also not eligible to receive the dividend because there is no obligation. They do not have any tax advantage associated with them and they also do not have any prior claim on the share of the company unless all creditors are paid.

A long-term note payable is used as a debt instrument and fixed payment of interest are needed to be paid and it offers with liquidity in the short run because the payment is made in the long run. It will have a prior claim on the Asset of the company.These interest payment have tax advantage associated with them.

Short term line of credit is type of debt which requires enough liquidity on the path of the firm to pay them and it also offers High flexibility in the short term as form need to have high liquidity to pay them off.