Question

Discuss various ways to finance a project and the pros and cons.

Answer 1

The various ways to finance a project are:
1)Debt financing-One can take out a loan and finance the project costs
Pros:
Ownership is maintained
Lower interest rate
Lower cost of capital

Cons:
Repayment needed even if business goes bankrupt
High rates for old debt even if macroeconomic conditions change
Collateral needed

2) Equity financing is when project financing provides share in a firm in lieu of financing
Pros- Easily availaible than debt
Not to be repaid in case of bankrupcy
Periodic payment as in case of debt is not required. Dividends can be paid as when the owner feels so
Cons-
have to share profit
High return required by investor
May lose control of company

Private equity funding is when a large investor invests in company and his share cannot be publicly tarded:
Pros- Capital is easily availaible and all capital can be raised at once
The private equity investor provides his insights
No return requirement and no cash flow has to be paid out as in case of equity
Cons-
More interference in day to day matters by investor
investor may want to recoup his investment when he feels so but company may still have better profits