Question

Discuss alternatives available for companies to raise capital. Describe the pros and cons a company must analyze prior to going public.

Answer 1

The alternatives available for companies to raise capital are :

• Debt - This represents borrowed capital. It may be in the form of a bank loan or bonds. Interest has to be paid periodically, irrespective of whether profits are earned by the company. However, there is no dilution of ownership for existing shareholders.
• Common stock - This represents owner's capital. It may be done through private placement of shares, or public issue of shares. Dividends are paid out of profits, but at the discretion of management, and there is dilution of stake for existing shareholders.
• Preferred stock - This has characteristics of both debt and stock. It may be done through private placement of shares, or public issue of shares. Dividends are paid periodically, irrespective of profits, but there is no dilution of stake for existing shareholders.

The pros of a company going public are :

• The amount of funds that can be raised is much higher with a public issue
• Going public raises the company's profile and recognition, which makes raising capital easier in the future

The cons of a company going public are :

• The amount of regulation and compliance is much higher for a public company
• The annual accounts are required to be disclosed publicly