What options are available to organizations for raising capital? How do different capital markets affect the cost of capital to an organization?© BrainMass Inc. brainmass.com October 16, 2018, 6:33 pm ad1c9bdddf
Financing Options available
A firm can broadly raise the long-term money that is capital broadly from two types of markets:
1. Debt Market
2. Equity Market
3. Hybrid options such as Preferred stock and Convertible Bonds
Thus firm's capital structure is that mixture of debt and equity. The aim of the optimal capital structure is to minimize its weighted average cost of capital (WACC).
Cost of Capital Markets
1. Debt Market
The after-tax cost of debt is lower than equity for many corporations. This is because it reduces a company's tax liability because interest payments are deductible expenses.
On the other hand increasing amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses.
As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped curve, with a minimum WACC between the extremes of debt utilization.
Cost of Equity
It is considered to be costly than the debt. It is the required rate of return that a ...
This discusses the Options available to organizations for raising capital
Having previously identified the location of its Greenfield investment, Acme, a multi-billion public MNE that is incorporated in the U.S., must next obtain external financing for its proposed overseas production facility. It has been estimated that the acquisition will cost $500M and all funds will be secured in the U.S. Your job is to explain to this committee some of the financial aspects of this acquisition.
Deliverable: At the next steering committee meeting, you will provide a detailed presentation of the characteristics of the various external financing alternatives, including the advantages and disadvantages of each. Your report should conclude with a recommendation of which alternative (or combination of alternatives) should be used to finance the overseas investment.