Question

What are the different sources of capital and in what order should the financial manner choose a source of financing?

Answer 1

Different sources of the capital are as follows-

A. Equity capital-this is a type of capital in which the ownership of the company is exchanged with the capital provider and the capital providers are known as the equity shareholders of the company.

equity can be arranged through various types of methods like initial public offer which will be issuance of the shares in the primary markets and shares getting subscribed by public. equity shareholders will be having voting rights and and they will be deciding upon the various operations of the company by passing different resolution in general meeting.

it can also be in the form of the right issue to different investors and it can also be in the form of venture finance and the Angel investor if it is a startup company.

B. Debt capital-this is a type of the capital in which various types of debt are issued by the company and it is subscribed by the public and company willhave to pay a certain rate of interest to those bondholders and these are fixed payment in the nature and the company will have to decide upon this payments by its liquidity position because these costs cannot be avoided.

debt capital can also be arranged in the form of the commercial loans and others form of the the short term money generating instruments like commercial papers.

while issuance of the debt capital the company will always be keeping in the mind the cost of the financial distress and comparing it with the interest cost benefit because interest cost are tax deductible in nature.

C. Preference share capital-this is a type of capital in which the company is trying to generate hybrid mix of both debt as well as equity because preference share capital will be having a priority on the claim of the assets before the equity shareholders in case of liquidation and they will also be having a fixed rate of dividend payment so they will be treated as a debt holder to some extent and they will also be having voting rights in specific issues so they will also be treated as equity holders to certain extent.

the financial manager should be choosing the debt equity and preference share capital based upon various factors of the company and it is not about prescribed conditions so there should always be a selection of these capital based upon benefits and the cost associated with these methods.

debt capital will be preferred if the company is having a higher rate of return and its rate of return is higher than the cost of debt so the company will be able to grow.

Equity shareholders will be always diluting the control of the company and those company who wants to dilute the overall control will be going for equity shareholders and equity share capital.

those company who wants an appropriate mix between the both the form of capital will be going for preference share capital.