Student Name: Louis Badawi

Student ID: 202100252

1- Why do corporations prefer to raise capital through debt

and not through equity?

First of all, Businesses often need external money to maintain their operations and invest in
future growth. There are two types of capital that can be raised: debt and equity.

Debt financing is capital acquired through the borrowing of funds to be repaid at a later
date. Common types of debt are loans and credit. The benefit of debt financing is that it
allows a business to leverage a small amount of money into a much larger sum, enabling
more rapid growth than might otherwise be possible.

In addition, payments on debt are generally tax-deductible.1 The downside of debt

financing is that lenders require the payment of interest, meaning the total amount repaid
exceeds the initial sum. Also, payments on debt must be made regardless of business
revenue. For smaller or newer businesses, this can be especially dangerous.

Equity financing refers to funds generated by the sale of stock. The main benefit of equity
financing is that funds need not be repaid. However, equity financing is not the "no-strings-
attached" solution it may seem.

Shareholders purchase stock with the understanding that they then own a small stake in the
business. The business is then beholden to shareholders and must generate consistent
profits in order to maintain a healthy stock valuation and pay dividends. Since equity
financing is a greater risk to the investor than debt financing is to the lender, the cost of
equity is often higher than the cost of debt.

The amount of money that is required to obtain capital from different sources, called cost of
capital, is crucial in determining a company's optimal capital structure. Cost of capital is
expressed either as a percentage or as a dollar amount, depending on the context.
The cost of debt capital is represented by the interest rate required by the lender. A
$100,000 loan with an interest rate of 6% has a cost of capital of 6%, and a total cost of
capital of $6,000. However, because payments on debt are tax-deductible, many cost of
debt calculations take into account the corporate tax rate.

Assuming the tax rate is 30%, the above loan would have an after-tax cost of capital of 4.2%.

When CEOs of early-stage companies think about growth capital, they rarely think of debt
financing. Venture capital has a larger mindshare, and a lot of founders are anxious about
taking money that has an interest rate or repayment cap attached.

They shouldn’t be. Financing your healthy growing company with debt isn’t the same thing
as maxing out your credit cards to fund your product development. You have paying
customers, maybe even a few enterprises. You have revenue. You have an accounting
function. This infrastructure makes debt easy to account for: you know your repayment
obligations ahead of time and you can plan for them.

In addition, debt financing may offer its own hidden benefits. Here are five reasons not to
be skittish about financing your company with debt.

1. In the long run, debt is cheaper than equity

Entrepreneurs tend to think of VC as free money. It’s not. In fact, if you plan to scale and
exit, debt is almost always the cheaper option.

Think of it this way. If you take a five-year loan of $1M at 20% APR, that $1M has cost you
$1.6M by the time you pay it off. But if you take $1M from a VC at a $5M valuation
(meaning you sell 20% of your equity), then get acquired for $15M, those VCs get $3M.

The same amount of capital at the same time, but the lender sells you $1M for $1.6M, and
the VC sells you $1M for $3M.

2. Debt gives you tax benefits

Assuming your company is out of the red, debt financing provides a few tax perks that
equity financing cannot.

If your business uses accrual accounting, the interest portion of your payment runs through
your profit and loss statement, which reduces your taxable net income. This means the
effective cost of the borrowing is less than the stated rate of interest. Essentially, the US
government helps mitigate the cost of your loan.
3. A lender isn’t going to tell you how to run your business

Taking on equity investors means giving them seats on your board. It also means
conforming to their expectations of how your company should grow. If you don’t like it, be
careful—they can limit your control over the business you started, or, in the worst-case
scenario, oust you from your own company.

Lenders don’t worry as long as you’re hitting your payments and staying in a position to
continue doing so. No board seats, no control.

4. For businesses with sticky revenue streams, debt can be very accretive

Jason Lemkin points out that if you’re an early-stage company with recurring revenue

streams (like SaaS or subscription-based services), a minor amount of debt will actually
increase your net cash flows. The extra cash will let you make a few key hires. If you hire
well, those folks will build out features and sales programs and you can see an ROI much
higher than the cost of their salaries.

5. More time to actually run your company

Raising a VC round usually takes between six and nine months of coffee meetings, pitches,
and phone calls. Raising debt financing is generally much faster. Lighter Capital, where I
work, often funds companies in one month.

Debt saves you time once you get it, too. Lenders don’t need to keep up with your every
decision, and they don’t require board meetings. They won’t need to deliberate with you
over every new hire or strategy.

The funding option you pick today will determine what you can and can’t do with your
business in the future. It’s important in those early years—after launch and before complete
traction—to be aware of all your funding options. Think about where you want your
company to be in one, five, or ten years, and think about how much time or control or
money you’re willing to give up to get there.

2- What is CPI?
What is Consumer Price Index (CPI)?
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices
of a basket of consumer goods and services, such as transportation, food, and medical care.
It is calculated by taking price changes for each item in the predetermined basket of
goods and averaging them. Changes in the CPI are used to assess price changes associated
with the cost of living. The CPI is one of the most frequently used statistics for identifying
periods of inflation or deflation.

Understanding Consumer Price Index (CPI)

The CPI measures the average change in prices over time that consumers pay for a basket of
goods and services, commonly known as inflation. Essentially it attempts to quantify the
aggregate price level in an economy and thus measure the purchasing power of a country's
unit of currency. The weighted average of the prices of goods and services that
approximates an individual's consumption patterns is used to calculate CPI. A trimmed
mean may be used as part of this.

The U.S. Bureau of Labor Statistics (BLS) reports the CPI on a monthly basis and has
calculated it as far back as 1913. It is based upon the index average for the period from
1982 through 1984 (inclusive) which was set to 100. So a CPI reading of 100 means that
inflation is back to the level that it was in 1984 while readings of 175 and 225 would indicate
a rise in the inflation level of 75% and 125% respectively. The quoted inflation rate is
actually the change in the index from the prior period, whether it is monthly, quarterly or
yearly.

While it does measure the variation in price for retail goods and other items paid by
consumers, it does not include things like savings and investments, and can often exclude
spending by foreign visitors. 

Key Takaways

 The Consumer Price Index measures the average change in prices over time that
consumers pay for a basket of goods and services.
 CPI is the most widely used measure of inflation and, by proxy, of the effectiveness of
the government’s economic policy.
 The CPI statistics cover professionals, self-employed, poor, unemployed and retired
people in the country but excludes non-metro or rural populations, farm families,
armed forces, people serving in prison and those in mental hospitals.
 CPI-W measures the Consumer Price Index for Urban Wage Earners and Clerical
Workers while the CPI-U is the Consumer Price Index for Urban Consumers.

How is CPI Used?

CPI is an economic indicator. It is the most widely used measure of inflation and, by
proxy, of the effectiveness of the government’s economic policy. The CPI gives the
government, businesses, and citizens an idea about prices changes in the economy, and can
act as a guide in order to make informed decisions about the economy. 
The CPI and the components that make it up can also be used as a deflator for other
economic indicators, including retail sales, hourly/weekly earnings. Additionally, it can be
used to value a consumer’s dollar to find its purchasing power. Generally, the dollar’s
purchasing power declines when the aggregate price level increases and vice versa. 

The index can also be used to adjust people’s eligibility levels for certain types of
government assistance including Social Security and it automatically provides the cost-of-
living wage adjustments to domestic workers. According to the BLS, the cost-of-living
adjustments of more than 50 million people on Social Security, as well as military and
Federal Civil Services retirees are linked to the CPI. 

Who and What Are Covered?

The CPI statistics cover professionals, self-employed, poor, unemployed and retired people
in the country. People not included in the report are non-metro or rural populations, farm
families, armed forces, people serving in prison and those in mental hospitals.

The CPI represents the cost of a basket of goods and services across the country on a
monthly basis. Those goods and services are broken into eight major groups:

The BLS includes sales and excise taxes in the CPI — or those that are directly associated
with the price of consumer goods and services — but excludes others that aren't linked such
as income and Social Security taxes. It also excludes investments (stocks, bonds, etc.), life
insurance, real estate and other items unrelated to consumers' day-to-day consumption.