Question

(TCO A) Compare and contrast two or more pros and cons of acquiring capital equipment through the following methods:

A. Municipal bonds
B. Traditional loans
C. Grant funding

Answer 1

I'm comparing Pros and cons (comparatively) between Municipal Bonds, Traditional Loans and Grant Funding for acquiring capital.

Municipal Bond

Pros:

-We can issue only revenue bonds for acquiring capital equipment that too through issuing equipment certificate, however, taxes imposed are very less to nil.

-There is high liquidity in the market for raising capital for acquiring capital through municipal bonds, that is raising capital is easy at lower rates.

Cons:

The process is tedious, first need a registration with MSRB (for USA), before filing the tombstone advertisement and a lot of paperwork involved, takes a lot of time as there are a lot of steps.

Although the market is liquid, investors have broker-dealers to invest in these securities, although these securities are federal and state level tax exempt, there is a principal supervision to invest in these securities.Although rates are very lower for raising capital.

B)Traditional loans

Pros:

The process is relatively simple if we have proper tender and project report to submit it to the bank, they will check the financial documents and Loan to value ratio before expensing monies.

Takes shorter time to raise the capital than other processes.

Cons

The interest rates usually are high compared to other methods.

All though the Corp. is using its leverage, Cost of Capital and the capital structure can change drastically depending upon the loan amount (higher change for smaller companies "SME")

Grant Funding

Pros

Grant funding is the tricky part, as Government needs to subsidize to provide the grant under the program for the Corp. to be eligible for the grant.

Cost of raising capital is very low, in some cases no need of repayment of the borrowed funds

Cons

The grant funding is subjective to the eligibility of our Corp. as there are several stringent rules mapped and our Corp. need to be placed under those rules to be eligible.

Grant funding is always subjective of various factors and has several steps to follow which can delay the entire process of acquiring or raising capital.

.