Question

Suppose you are the financial manager of a company and you are seeking funds for a project. What possible sourse of financing can you think of? List at least three financial markets or financial intermediaries that will be involved.

Answer 1

If I am the finance manager of a company, I would be raising fund for the project using these three methods of financing-

A. I would try to use Angel investing and venture financing as equity financing methods which will be helpful in generating fund for my company and this kind of financing are offering large amount of investment with exchange of equity.

There are lessor number of intermediaries and there is direct involvement of owner and venture capitalist and Angel investors

Advantages of Angel investors and venture capitalist are that they will be providing large amount of capital and they will be willing to take a lot of risk and they will also be providing with expert and specialised knowledge

disadvantages of these kind of investors are that they would be looking for interference into the management of the company.

B. I will also try to generate funds through initial public offer which is an example of equity financing and I will also be trying to use another equity method of rights issue, If the company is already listed.

Various financial intermediaries involved in initial public offer are investment banks and underwriters.

Advantages related to equity financing is that the company will be having a large amount of investors and company will also be generating a large amount of money from issuance of the initial public offer and it will help the company to reaching to a potential customers and investors.

Disadvantages related to equity finance is that there would be dissolution of control on the part of the management and there are large amount of flotation cost involved due to underwriters.

C.I can also be exploring debt financing as a method of using capital in the company because debt financing will be helpful in generation of large amount of capital with payment of fixed nature which will be interest payment and interest payment are tax deductible in nature so the company will be able to use debt capital.

Financial markets which will be involved will be money market and intermediaries involved will be commercial bank.

Advantages of debt capital is that these are helpful in in tax deduction of interest payments and they are also not leading to dilution of equity.

Disadvantages of debt financing is that it will have a fixed charge associated with it and it can lead to cost of insolvency and financial distress to the company.