Question

Suppose you are financial manager in your company and the company wants to make innovation on products. However, the company’s financial funds are not enough to make innovation. How you can raise funds through financial market?

Answer 1

The company can raise funds in the financial market by equity financing and debt financing.In equity financing the firm generates funds by selling it's shares.The shares can be common shares or preference shares.With common shares comes the right to vote,this is not present with preferred shares.But in the event of liquidation preferred shareholders are given priority over common shareholders,also preferred shares come with a fixed dividend payment.When it comes to raising capital through equity financing the firm is not burdened with interest payments,or even the repayment of the investment made by the investors in the company.The downside to equity financing is the higher cost of capital(due to higher risk) and the fact that the investors are owners of the company(dilution of ownership)

Debt financing may involve raising funds through bank loans or thorough issuing corporate bonds to bondholders.In case of bank loans the the firm is required to pay interest payments,the same applies to bonds. When it comes to debt financing the firm is mandated to make interest payments on amount borrowed,also the firm is required to pay the amount borrowed back to the lender.This may weigh heavily on the company especially if it false on harder times and struggles to generate revenue.On the bright side the cost of capital of debt is often lower than the cost of equity.Firm's often strive to discover and make use of an optimum mix of debt and equity financing for expansion purposes.