Question

REAL ESTATE FINANCE

What criteria should be used to choose between two financing alternatives? Please elaborate by expressing your thoughts about your findings in at least 3 – 4 sentences.

Answer 1

Between two financing alternatives firstly the incremental cost of borrowing must be compared. So one financing alternative may have a lower cost due to tax benefits while the other may have a higher cost because there are no tax benefits involved.

The tenure of the financing requirement needs to be considered. For instance if the finances required for longer period either equity or long term debt must be considered and if the finance is required for the shorter period the person must consider working capital for a short period loan.

The repayment terms must also be taken into account. While the outside liabilities have to be paid on the maturity date the equity and owners funds need not be paid except on liquidation.