Being a financial manager of a large firm, you need $70 million over the next year. What are the more likely alternatives for you to borrow or raise $70 million?
What are the issues that would surround your final decision of where and how to raise these funds?
Compare and contrast the various options available to you in the financial markets.
Please explain in detail
Raising funds for a company is a critical issue that requires careful thought as it impacts on the capital structure of a company which in turn determined how attractive the company will be. In this sense there are various alternatives that may be used in raising the $70 million funds required by the business. This paper analyses the likely alternatives to borrow or raise $70 million and the issues that would surround the final decision of where and how to raise these funds. It also compares and contrasts the various options available in the financial markets to raise funds.
Comparing and contrasting alternatives available to raise $70 million:
In any business there are primarily two ways in which a company can raise funds. These are through debt or equity. Within these two, are a wide array of financial vehicles that can be used to raise the $70 million needed. The difference between debt and equity financing is that debt financing is mainly a borrowing where the company would enter in a contractual agreement to periodically repay the principal amount borrowed together with interest rates within a set time period. Equity financing on the other hand involves selling part of the company stock to investors so as to raise funds in such a way that the investor is liable to share in the profits (residues) of the company. Generally tax laws have favor interest expenses paid due to a debt rather than to dividends paid to investors where the interest expenses are tax deductible creating tax savings, where as the dividends are taxable (Adam, 2006).
As noted, equity financing mainly involves investing in the stock of the business. in this sense a key instrument in equity financing is offering additional common stocks known as rights issue or seasoned equity offering (SEO), to the market based on the prevailing market price (QFinance, 2012). Issuing Preferred stock in this case often has more benefits than common stock. This will enable the shareholders to purchase new shares at specified prices within a given period. These rights issue will be offered on a pro rata basis for instance three shares for every five that shareholders have. This alternative has an advantage in that a company can be able to raise more capital from its shareholders without having to increase its debt levels. On the other hand it has a disadvantage in that it dilutes that holdings of the existing shareholders in the company and this can cause dissatisfaction to minority shareholders who will most likely lose most, especially those who do not have preemptive rights (QFinance, 2012; Escudero, & Arata, 2010).
Another equity financing tool that can be use in order to raise the $70 million funds needed by the company is the contingent value rights which enable investors to be able to sell their stocks for a fixed price enabling value to ...
The expert examines raising funds by borrowing or fundraising.