Select a balance sheet of a manufacturing company and a banking company and identify the various instruments used by them to raise the capital. Also analyse these instruments critically.
Capital can be raised in one of two ways; equity capital or debt capital. Raising capital via equity is normally more expensive than debt capital since equity investors (shareholders) demand a higher rate of return on their money due to the higher risk they expose their capital to when compared to debt capital (such as bank loans, bonds and other forms of debt instruments). When companies raise capital one of their main objectives would be to minimise the overall cost of the capital they are seeking to raise. Be it equity capital or debt capital, the businesses will seek to achieve either the lowest level of dilution, or the lowest rate of interest on the debt instrument – or, even more likely, both. Raising capital can be as simple as using a bank overdraft facility or as complex as designing a whole capital raising program which would finance both current operations as well as future growth plans. It is always advisable to plan well in advance for such programs so as to reduce any chance of jeopardising the business due to lack of finances. Such programs would typically be characterised by both debt and equity. The key is to achieve the right debt-equity combination which would minimise the overall cost of capital and hence maximise shareholder wealth. Furthermore, this combination should also be suited to the company’s existing and future expected cashflows in order to ensure longevity of such a program.
It’s the most wonderful time of the year! There’ll be much hollying and jollying, but there will also be plenty…
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