Question

The sources of business financing for assets acquisitions come from either internal or external sources. Internal sources such as retained earnings are the cheapest but Scarce or not enough for large assets investments. External sources (debt and equity) are more expensive and corporations have to decide on how much debt and equity to use over time (known as capital structure). Understanding characteristics of debt and equity is a key challenge to financial managers and of great importance to corporations’ market value. For example, corporations need to finance at the lowest cost of capital and in this regard, understanding of sources of funds available in international capital markets is important to corporations’ choice of capital structure. The deductibility of interest payments (on bonds or loans) lowers the cost of debt (subject to levels of corporate taxes across countries) but high debt ratio increases the risk of bankruptcy. Equity does not pay contractual interest and the risk of bankruptcy is reduced, but many corporations prefer not to issue equity to avoid stock dilution or loss of ownership and control.

The availability of capital sources and cost of capital for corporations vary across countries or regions due to many reasons such as institutional and legal quality, sound financial environment, access to capital markets and banking sector, economic environment, etc... Corporations located or headquartered in the UK as a country in Europe for example, could have comparative advantages over corporations in the Gulf peninsula such as those in Qatar for their optimal choice of capital structure and cost of capital. Understanding how corporations in both markets can efficiently access international capital markets is of great importance to financial managers in light of increased regulations and governance on international financial integration (ability of corporations to access global capital markets for financial activities such as raising capital). Access to international capital markets for raising debt and equity means better choices, access to larger and more liquid capital markets, better management for risks related to interest rate and exchange rate of the currencies being borrowed or lent, etc...

The purpose of the current assignment is to analyze and compare the Financing Choice of a firm in Qatar and United Kingdom in a global environment. In this regard, offer your answers to the following questions:

• Describe the main financing sources for corporations in both countries (United Kingdom and Qatar). Explain the reasons whether and why corporations in both countries are looking beyond national borders to access international capital markets. (Dimention1)
• With greater financial integration in the last two decades, what are the main factors that affect their choices of capital? Are legal considerations, economic potentials and challenges, demographic and cultural transformations act as factors that determine their decisions-making process on capital structure? Explain your answer. (Dimention2)
• From the previous question, what impact do the previous factors have on the choice of capital structure for corporations in both countries and how will they affect corporate financing decisions in the future. (Dimention3)
• Based on your previous analysis on the factors that affect capital structure and financing choices, do you find the globalization of capital markets (integration of international capital markets) has played a complete positive impact on the capital structure and choices of capital in both countries? Explain your answer. (Dimention4)

Answer 1

A. Main sources of Finance in United Kingdom are

• Capital Markets - Issue of equity of shares , Bonds and other instrument traded on stock market.
• Depositary Receipts
• Venture capitalist
• Business loans
• Private equity finance
• Bank overdrafts
• crowd funding
• angel investment

Main sources of Finance in Qatar

• Regulated equity capital markets for only domestic listing and foreign investments are restricted to 49% only
• Initial public offering regulated by Qatar financial market authority.
• Debt capital markets - issue of bond , commercial papers and notes
• Bank Lending
• Islamic Finance - deferred sale, leasing and sponsorship are the instrument used for financing creating the charge on assets.
• Project financing
• Private equity

Access to capital markets across the world enables both the country to borrow during tough times and lend during good times. It promotes domestic investment and growth through capital import. Worldwide cash flows can exert a corrective force against bad government policies.

B. Following factors affect the choice of capital structure :

• Stock market conditions-- When the market is dull, investors are mostly afraid of investing in the share capital due to high risk.
• Legal & Regulatory Framework: Public issue of shares and debt instrument are regulated by government bodies and require certain obligation to be fulfilled
• Owner ship control: It is  ensured that the control of the existing shareholders (owners) over the affairs of the company is not adversely affected.
• Risk consideration : Financial and operating risk to be consider.
• Flotation cost : the cost of issuing debt capital is less than the share capital. This attracts the company towards debt capital.
• Cost of equity of capital : Cost of equity capital is affected by the debt capital
• Debt Service coverage ratio : Better ratio means the better capacity of the company for debt payment.
• Interest Coverage ratio: Its is the capacity of the company to use debt capital will be in direct proportion to this ratio.
• Demographics and cultural transformation: If you see Islamic Finance has plays a major role in financing in Qatar due cultural values.

After considering the above factor  legal considerations, economic potentials and challenges, demographic and cultural transformations act as factors that determine their decisions-making process.

C. The impact of previous factors are on Qatar will be as you see that Qatar has legal and regulatory requirements regarding 100% foreign direct investments so it restricts the corporation to get 100% finance by the foreign investor, hence it leaves the control with the controlling interest with company although due to integration private equity has also entered the market as financing options on the other hand UK has access to markets all over the world and can raise finance everywhere in the world as per their choice of capital structure such as stock market conditions , risk consideration , flotation cost and cash flow requirements.

D. Indeed globalization of capital market has positive impact as increasing integration of global capital markets now makes it easier for firms to access capital outside of their home countries. Firms access international capital markets through a variety of means such as initial public offerings , cross-listings, depository receipts, shelf offerings , Venture capital and  private equity. Firms can also access debt resources outside their market through bank loans, foreign bond issues and commercial papers.