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Most businesses are currently faced with challenges when it comes to financing their operations. There are diverse options to choose from, and each has its own advantages and disadvantages. Companies that do not have access to advice from professionals sometimes find themselves making the wrong decisions when choosing the means of finance. Such decisions are sometimes very costly and have been known to lead to bankruptcy in some companies. There are two major financing options; debt finance and equity finance.
This paper will choose one form of financing option from each category and then analyse it in detail.
The paper will also give a brief conclusion and recommendation on the subject. Equity finance: Initial Public Offering (IPO). This is a form of equity finance that is used by companies, and involves raising capital through issuing shares or common stocks for the first time to members of the public. It is suitable for small companies that are looking for capital in order to undertake an expansion strategy, or larger companies which have the objective of becoming publicly traded.
The offering may take various forms which include best efforts, Dutch auction, bought deal, self distributing stock or firm commitment. The bought deal is most common in general IPOs, and is also called the traditional IPO, while the Dutch auction is common in on-line IPOs. Companies that are willing to undertake an IPO may choose to have an underwriter who will be responsible for floating the shares. The duty of an underwriter is to advise the company on the best time to float the shares, the type of shares to float, and the price that is optimum for the market.
Investors purchase these shares or securities with the hope that the prices of the shares will go up, after which they can sell and make a return on their investment. Initial public offers work very well for companies that are relatively large and well known due to a good track record. This is because very few investors are willing to risk purchasing shares of a company that is unknown, or has no proven track record. Benefits of offerings as a source of finance.
IPOs are considered the easiest way by which companies can raise capital. According to Siciliano (2003: 21-34), this is because they do not attract interest rates for repayment unlike debt capital. The major costs that are incurred are the costs of floating the shares, and in relation to the capital raised, it is by far one of the best options for any company. When issuing IPOs, the share price is usually expected to rise, and this rise will give the company favourable publicity.
This makes more investors be willing to purchase shares of the company, and this is set to push the share price upwards, which means that the company will raise higher amounts of capital. IPOs, especially on-line IPOs give a large number of people a chance to purchase shares of a company. This is set to make the company raise a high level of capital, as will be later proved by the analysis of the Google IPO. Weaknesses of offerings as a source of finance. The issue of an offer has the potential to cause problems for the management, regarding the ownership of the company.
New owners join the company and therefore dilute the ownership of the company. This means that before any major decisions may be made, the management should consult these new owners. This has the potential to delay the decision making process. Undertaking IPOs, especially traditional IPOs consumes a significant amount of money. Costs incurred, which are mainly administration costs, and other costs for purchasing and printing materials make the whole exercise expensive, and this may reduce the profits of the company.
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