Question

Which of the following is one of the main advantages of using long-term debt financing instead of equity financing?

1) Higher control over the company
2) Lower interest payments
3) Reduced financial risk
4) Increased flexibility in capital structure

Answer 1

One main advantage of using long-term debt financing is maintaining higher control over the company compared to equity financing, which involves sharing ownership with shareholders.

Step-by-step explanation:

One of the main advantages of using long-term debt financing over equity financing is higher control over the company. When a firm opts for long-term debt, such as borrowing from a bank or issuing bonds, it maintains full ownership and operational control.

This is because debt financiers do not have voting rights within the company. In contrast, equity financing—through issuing stocks—dilutes ownership and adds the responsibility of being answerable to shareholders and a board of directors, which may lead to a loss of control over company decisions.