In 300 words or more answer the following: Opening review of finance in Week #1
ID: 424188 • Letter: I
Question
In 300 words or more answer the following:
Opening review of finance in Week #1 centers on money and its’ value, bonds and stocks.
With our current economic conditions, if you were looking for financing today for capital, where and how would you obtain capital? In the perspective of corporations not individuals, your analysis should concentrate on corporate financing.
In your discussion give examples of capital financing and their costs. Plus, please comment on the strategies you would use to achieve this financing.
Explanation / Answer
Financing the business operations are not an easy job. Business doers must have ascertained beforehand the strategy to raise funds which must cost less and add value more. Capital financing can be by the two broader modes, one is through Equity and another is through debt.
For Equity –
Here the company issues share to the private individuals if private limited company and to the public if public limited company and raise funds in form of share application money and allotment money. Here the shareholders expect some kind of return in it in form of dividend and appreciation in the value of shares purchased. It cost less, as dividend is not a mandatory amount to be given to shareholders and market value depends on the market conditions and performance of the company so therefore no fixed liability is there and at the time of winding up of the company. Firstly, all the creditors are paid and at last the shareholders are paid with whatsoever is left.
For Debt –
Here the company raise funds via Bank Loans, personal loans, overdrafts or credit cards or issuing of debentures by the company. They all carrying a liability to pay back the funds raised along with interest which is huge. Therefore, it is somewhere costly affair but a good option to raise funds if the company doesn’t want to increase its shareholders for delayed operations as greater the number of shareholders is, more delayed would be the operations to arrange for approvals if required.
Now to ascertain the cost of capital we would have to analysis the situation as to what would be the rate of return, if we have invested the money in to another project. That is, it is opportunity cost of making an investment.
Strategy required to analysis the company needs and plans and based on which we will decide how much is required to raised and accordingly we will revise the business plan and forecast the financial prospectus then we will alter and develop the strategy and search for financing and thereafter negotiate with investors.