Question

As the CFO of GES Corporation, which is a fashion design firm, you need to find $5 million to expand the company's production. Research and discuss how the process of raising the $5 million would be different with the assistance of a financial institution versus raising the money directly from the financial markets?

Answer 1

Both financial institutions and financial markets are good options, but it is most beneficial to draw the required amount from where the costs to be incurred is low. We all know about raising funds is associated with some costs. Infact these initial costs for raising funds plays a vital role in deciding whether to go for which option.

Coming to financial institutions they have wide variety of options to choose depending upon our requirement. We need to pay a fixed amount of interest cost to those financial institutions. Most important thing here is that sometimes they offer moratorium period for interest and repayment of principle.

And coming to financial markets, from these we have to options only. Whether to go for equity capital or debt capital. Debt capital involves fixed payment of interest irrespective of earning of company. And equity capital holders expects high returns for the risk they taken. A good mix of debt and equity is suggested if company wants to raise money from financial markets.

So, going to financial institutions would be different in respect of moratorium period. And going to financial markets would be different in respect of debt equity mix.

As a CFO of GES Corporation I can suggest to raise money through financial institutions to boost up production. Because some portion of money is blocked in production and it will only released after production completes and sale happens. For this blocked period we may ask them moratorium period for interest payment as well as principle repayment. So that production process is not distrubed results in good returns.