What are some examples of sources of capital available to corporations? Describe how a corporation raises short term and long term capital through the US financial system.
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What are some examples of sources of capital available to corporations? Describe how a corporation raises short term and long term capital through the US financial system.
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The capital funding of a company is made up of two components: debt and equity. Various Options of raising long finances:
1. Issue of Equity Shares
Equity can be raised either by private placement or by public. Intel has got strong track record; thus it can use this route to raise money. It has following features:
Advantages of raising shares
Permanent Capital: It need not be paid back
Borrowing Base: It can be used to trade on equity
Dividend Payment Discretion: The payment of dividend is in the hands of management
Disadvantages
Cost: It is more costly than debt
Earnings Dilution: It involves reduction in EPS.
Ownership Dilution: It involve sharing of ownership
(Pandey, IM)
Bonds
It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with fixed rate of interest on a specified date, called as the maturity date.
Advantages
Less Costly
No ownership Dilution
Fixed payment of interest
Reduced real obligation
Disadvantages
Obligatory Payment
Financial Risk
Cash outflows
Restricted Covenants
Issue Convertible Debenture
It is issuing of convertible debentures to which will be convertible into equity after few years. It involves selling of ordinary shares in future at a higher price.
Benefits
Avoiding immediate dilution of earnings.
Using low cost capital initially.
Convertible warrants
A warrant entitles the purchaser to buy a fixed number of ordinary shares at a particular price during a specified time period. It is similar to an American call option.
Benefits
Sweetening Debt
Deferred Equity Financing
Cash Inflow in Future
Zero-Interest Debentures
ZID or zero coupon bonds or deep discount bonds do not carry an explicit rate of ...
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