Question

Discuss factors that managers consider before they want to raise new capital be it debt or euqity (500Words)

Give some advantages of equity capital over debt (400words)

Thank You

Answer 1

A. Factors to consider before Raising new capital are :-

1. Amount of capital required by the firm - Some sources can raise only a limited amount while some sources can raise large capital

2. Timing - Timing of raising new capital is very important. In todays time, because of Covid 19, company may not want to raise the capital since they may not get sufficient valuation

3. Why is the capital needed? Cash flow proceeds for the end outcome can influence source of capital

4. Matching product to market needs - Capital must be raised only if intended use to produce a new offering matches its market or the audience. If there is a mismatch, it will only anger the existing investors

B. Equity is preferred over Debt fincncing because of following factors:-

1. Eventual repayment - Unlike equity, debt must be rapid in some point of time.

2. No fixed cost to repay - Equity capital does not promise to pay a fixed return unlike Debt capital which requires predetermined coupon payments or interest cost. Thus, risk of default is avoided. Thus dutring difficult financial times, equity is preferred over debt.

3. Huge amounts can be raised - with Debt financing, limited amount can be raised while companies can raise huge amount by offering IPO or FPO.

4. Restrictions - Debt often comes with restrictions on companies activities, future financing, pursuing non business related activities etc

5. Pledge - Collateral is required for Debt financing. Companies needs to pledge its assets while same is not required under Equity financing.