Question

Review the discussion and discuss whether you agree or disagree with the intent and what is your opinion.

Companies have a number of different options when it comes to raising capital. Each particular method comes with advantages and disadvantages. The examples include:

Bonds

When a company issues bonds, it’s borrowing money from investors in exchange for interest payments. The money has to be paid back. Issuing bonds allows for faster access to capital, avoids having the company sell assets, and allows for a tax break as the interest paid to investors can be deducted from the company’s taxes.

Disadvantages of issuing bonds include the interest payments must be made. If a company over-extends it could very well end up bankrupt if it is unable to make those payments to its investors.

Bank loans

Advantages to bank loans give a business owner complete control over how they use the money. The only concern is making sure that the loan payments are made on time. Bank loans also are often the most cost effective way to borrow money, offering lower interest rates than other methods. This also allows a company to retain earnings and leverage tax advantages that come with interest payments.

Disadvantages of bank loans include the strict requirements, including some form of collateral being required. If a borrower falls behind or fails to make payments, the bank may seize the business assets.

Equity financing

Equity financing has many benefits including, the funding is committed to the business and the projects the business has planned. Investors receive payment only if the business is doing well. Those investors expect the business to do well and often invest time and energy in helping the business to thrive.

Disadvantages include that the time, effort, and energy involved in raising equity finance may take the focus off of the business. At times, potential investors want a lot of information on the business, and may require a certain amount of control over the business.

The company that I am with has leveraged equity finance in obtaining bank loans.

We were able to raise $10 million internally, only sacrificing 22% of our equity. The capital we raised came from some team members of the business and from the CEO’s former business partner in another venture. From that event, we were able to then borrow another $5 million from Bank of America, showing a healthy balance sheet, consistent growth, and a talented team committed to building our business model quickly. We will be able to leverage these dollars to add another $40 million in revenue to our growing company.

As far as a public company that used a combination, Ford Motors stands out. Prior to the Great Recession, Ford reached out to the nation’s banks. They mortgaged Ford’s assets to obtain billions in loans to overhaul the automaker’s business. Ford received $23.6 billion in loans. This move allowed Ford to survive and not accept any government loans when the auto markets started to crash. Ford also took steps to fund half of its new retiree healthcare trust with company stock.

Answer 1

Debt capital: The above mentioned Bonds and Bank loans comes under this capital as it involves paying the agreed amount at a later date to the party agreed to. This debt capital should be avoided as far as possible as it never concerned about the rate of revenue of the company

Equity capital: This capital is allocating some part of our own capital to the other candidates interested. This is the most preferred one as it's concerned about the rate of revenue of the company rather their selfish deals.

Company 1: It has raised it's maximum capital internally through equity capital which is a good sign as the members have faith on its perpetual quality and raised $10 million and through that consistency they borrowed $5 million which might probably not a good sign as the interest payment has to be done even in lapse of proper revenue to the company. But as they estimated the revenue to be over $40 million these financing sources are good source of capital.

Company 2: This decision of Ford has kept it an independent example for all the large group of companies even though it has an healthy financial statements then and this can be quoted well with the following reference link provided in the Forbes.

Reference link: https://www.nytimes.com/2009/04/09/business/09ford.html