Question

List and explain different ways a firm can raise capital. Include in your discussion the different underwriting methods firms could use.

Answer 1

Firm can raise capital through
1. Retained Earnings
This is the most basic source of funds for any company and, hopefully, the primary method that brings in money to the firm. The net income left over after expenses and obligations is known as retained earnings.

2. Debt Capital
This can be done privately through bank loans, or it can be done publicly through a debt issue. the interest paid on debt is typically tax-deductible for the company and those interest costs tend to be less expensive than other sources of capital.

3. Equity Capital
A firm can raise capital by selling off ownership stakes in the form of shares to investors who become stockholders. The benefit of this method is that investors do not require making interest payments this type of capital can be raised even when the first is not earning any money

Different Underwriting methods that firm could use -

a. Firm commitment

In this method, the underwriter agrees to buy the entire issue at a certain price. If the underwriter fails to sell the entire issue, the underwriter must take full financial responsibility for any unsold shares.

b. Best efforts

The best efforts as name suggests, there is no financial or legal responsibility imposed on the underwriter for any unsold shares or deal performance.

c. All-or-none

Under this commitment, unless the entire issue is sold at the offering price, the deal is voided, and the underwriter will not receive any compensation.