Question

Discuss how (be market and security specific) and why firms raise capital. Discuss the costs related to each method of raising capital (include all costs of each method)

Answer 1

How and why firms raise the capital?

• Firms raise capital in capital by two types,
  • Debt Capital- The types of debt capital are bank loans, personal loans, bonds and credit card debt. a company can raise additional capital by applying for a new loan or opening a line of credit.
  • Equity capital- the firm can come up with an IPO for the first round of fund raising. the later on can be raisedby issuing shares in the secondary share market.
• Firms raise capital because
  • The business should run ideally
  • the working capital requirements of the business should be met.
  • a initial capital is to be raised to fund the capital investments necessary for the operation to begin.
  • for the purpose of expansion additional funds are rquired to attain the objectives.
  • to pay the debt, funds are required.

Costs realted to raising capital

• Dividends to be paid to the shareholders
• Meeting shareholders expectations regarding the return on investment
• Intrest to be paid on the debt fund.
• opportunity cost of the funds invested
• fees and commission to be paid for raising the funds.