Question

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QUESTION START

a) Describe four feasible ways for small firms to raise capital.

b) Describe two advantages and two disadvantages for firms to raise capital through debt instead of equity. (4 mark)

c) Explain the difference between IPO underwriting spread and IPO underpricing.

QUESTION END

Answer 1

1. Four feasible way for small firm to raise capital would be-

A. they can raise the capital through venture capitalist who will be providing a capital in exchange of the equity.

B.they can also look for Angel investors who will be providing the capital also in exchange of equity and they will also provide with the specialised experiences

C. Small business can also look for issue of equity shares in order to raise the capital which will be issuance of equity shares in the primary market

D. Small companies can also issue debentures which is a form of debt capital and which would be bearing a fixed charge.

2. Two advantages of firm to raise capital through debt would be-

A. Interest which are payable to debt holders are tax deductible in nature

B.there can be a low rate of interest on debt as well and they can help in maximizing the growth

Disadvantages associated with deat capital would be-

A.they bear a fixed amount of charge and even if the company is making loss, they would have to be repaid

B.they have a cost of financial distress and they can lead to bankruptcy of the company

3.difference between IPO underwriting spread and IPO underpricing is that IPO underpricing means issuance of initial public offer at lower rate than the actual price which will be reflected on the day of listing closing price.

IPO underwriting spread means the spread which are charged by the underwriters for management of the initial public offer from the company.

Initial public offer underwriting spread is a charge, where as initial public offer underpricing is a miscalculation on the part of underwriter to price the initial public offer