Equity financing is preferred for related diversification while debt financing is preferred for unrelated diversification.

Question

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Related diversification involves expanding into businesses that are related to the existing business, which may have synergies and shared resources. Equity financing is preferred in this case as it helps spread the risk and allows for flexibility in funding growth opportunities. On the other hand, unrelated diversification involves expanding into businesses that are not related to the existing business, which may have a higher risk profile. Debt financing is preferred in this case as it helps limit the amount of risk the company takes on by providing a fixed repayment schedule and minimizing shareholder dilution.

Equity Financing Is Preferred for Related Diversification While Debt Financing