Question

What would be your recommendations with respect to raising a huge additional funding of £50 million to enable the next stage of development of international projects to be carried out by a corporation?

Answer 1

Raising funds is quite a long process and during this process the organisation has to take lot of decisions which determines the cost of the funds. The things to be considered while raising the funds would be:

• Debt- equity ratio : While raising funds from different sources the important thing to look for is the debt equity ratio of the company. You need to compare the existing debt equity ratio and debt equity ratio which will be after you have raised the funds, taking on excess leverage can be devastating for the funds and cause bankruptcy situation.
• Weightage average cost of capital : Instead of looking at cost of one source of capital, look at the weightage average cost of the capital. The weightage average cost can be high as well as low, the optimal debt equity ratio to use is the one where the WACC is least.
• Currency to be raised in : Since the investment is for international projects, look for possible ways if the funds can be raised in the local currency where the Investment is being made. That way you would reduce the currency exchange risk at the initial stage of the project.
• Terms and conditions of the sources of funds : if the fund is being raised from the equity, there is no obligation for timely payment but if the fund is being raised from the debt, there is obligation to make timely payment which if not made can raise issue on creditworthiness of the company. look for favorable terms and conditions while raising funds from debt source. For example, Can a company delay Interest payment in the begining years.