Question

Describe financing within capital market. What is the difference between debt financing and equity financing? What is hybrid financing? Give 2 examples of debt financing and explain the advantages and disadvantages of such financing. Give 2 examples of equity financing and list the advantages and disadvantages of equity financing

Answer 1

The modern financial markets includes the capital market which has two very main objectives to fulfil,.

The first is to act as a market to channelize the funds from the investors to the borrowers

And secondly to impart liquidity in the overall system.

As such the global capital markets helps in raising of funds for the companies for their long term operations. Financing with capital markets takes place in two main forms

No	Segment	Description
1	Equity segment	· In the equity segment the capital market helps the companies to raise equity capital through floating of equity shares by which a company goes public . · The shares are first issued in the Primary market of the Capital markets where an issue is done through a process called as IPO or the Initial public offering . · Once the investors have subscribed for the IPO the company can account for the amount of capital raised from the capital makert into the books of the account · When the shares gets listed on the exchange , the free trading in the secondary market segment of the capital market, increase the share value and the additional premium is listed as “share premium” by the company
2	Debt segment	· In the debt segment , the company issues fixed income instruments known as bonds or debentures to the investors in the market . · These instruments are risk free and has a fixed amount of coupon or interest payment attached to it. · So by issuing debt securities the company also raises capital in the capital market

	Equity financing	Debt financing
1	In equity financing , capital is raised by the issue of equity shares	In debt financing , capital is raised through isuue of bonds and debentures
2	There is liquidation of ownership as the all the equity shares holders are proportionate owners in company	No dilution of ownership
3	Has NO obligatory payments of coupon	Has obligatory interest and coupon payments
4	Voting rights had to be given to equity share holders	No voting rights given in debt financing
5	No rating of instruments required .	Instruments need to be rated by rating agencies befor issuing eg AAA rated bonds

In hybrid financing , special instruments are issued which ahs both the characterises of debt and equity capital . Capital raising through Preference shares are a mode of hybrid finaing for the companies

Both debt and equity financing are used oin the proportionate amount in the capital structure of the company , andt their advantages and disadvantages are tabulated above

Debt Financing

Eg – Issue of BBB+ rated Bonds

Issue of Corporate debentures

Equity financing

Eg- IPO initial public offering

FPO – Follow-up public offering