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    Rasing Capital and Risk Management

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    I need some help with these discussion points:
    Short Discussion 1:
    • What process must a company take to raise capital? Are there different methods for different types of companies? What are the risks and benefits of each?
    • If taking a company public is such a good idea, why don't all companies choose to do so? What are the risks? What are the benefits?
    • What is the difference between an IPO and an SEO? Which would you choose to invest in and why?

    Short Discussion 2:
    • Provide an example of a short-term financing strategy and a long-term financing strategy. In what financial scenario would each strategy be most applicable? Is one method preferable to the other? Explain your rationale.
    • Give two examples of credit policy affecting the cash conversion cycle. Is relying on credit as a form of capital management advisable? Why or why not?
    • Of the three types of loans available for corporations, under what scenarios would each be appropriate? why.

    Short Discussion 3
    • Name three relevant risks to businesses. What methods can be used to alleviate the threat of each risk?
    • What is your opinion of the Terrorism Risk Assurance Act (TRIA), passed in response to the September 11 attacks?
    What might be another significant event that, if it took place, would forever alter the landscape of financial risk management? What lasting effects might it have on businesses?
    • How should derivatives be used in risk management? What problems might occur with their use?

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    Solution Preview

    Discussion 1
    The company must launch an Initial Public Offering or IPO to raise capital. We understand that the company is a corporation and wants to raise equity capital. There are different methods for different types of companies. A proprietor will have to raise money from his own assets or borrow it from his friends and relatives. A partnership will raise money from its partners, an S Corporation will raise money from its shareholders, and a cooperative society will raise money from its members. The benefits of an IPO are that large sums of money can be raised but the risk is that compliance with SEC rules is required. In case of proprietor business, the benefit is that money can be raised quickly and with minimal paperwork. The risk is that adequate finance may not be available. In case of partnerships the benefit is that more capital than a proprietor business can be raised. The risk is that any conflict or death among partners can lead to dissolution of the business. In case of S Corporation, the benefit is that there is limited liability for shareholders, and the corporation is not taxed. The risk is that the capital raised may be inadequate for operations.

    All companies do not go public because there are disclosure requirements. The public companies are regulated by SEC and financial reporting requirements are difficult for smaller companies. The costs for reporting are so high that smaller companies cannot afford them. The benefit of going public is that very large sums of capital can be raised. Capital can be raised for ...

    Solution Summary

    The solution to this problem explains financial management and business risk. The references related to the answer are also included.