Describe the main sources of finance available to companies. Evaluate the advantages and disadvantages of raising finance via equity or via debt.
The main sources of finance available to companies are as follows:
Equity shareholders also have voting rights.
A company must restrict its self-financing through retained profits because shareholders should be paid a reasonable dividend, in line with realistic expectations, even if the directors would rather keep the funds for re-investing. At the same time, a company that is looking for extra funds will not be expected by investors (such as banks) to pay generous dividends, nor over-generous salaries to owner-directors.
Holders of loan stock are therefore called long-term creditors of the company. Loan stock has a nominal value, which is the debt owed by the company, and interest is paid at a stated “coupon yield” on this amount. For example, if a company issues 10% loan stocky the coupon yield will be 10% of the nominal value of the stock, so that $100 of stock will receive $10 interest each year. The rate quoted is the gross rate, before tax.
Finance is required by any company to establish and run its operations is known as company finance. No business/company can function without an adequate amount of funds for undertaking various activities. The funds are required for running day-to-day operations (working capital requirement), and for undertaking growth and expansion plans in a company.
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