Question

Question 1 Imagine two siblings, Tony and Jack Lee are planning to set up a company in Malaysia. They need to raise RM3 million to get their company off the ground. For many entrepreneurs, especially first time founders, raising capital can be daunting. Tony has proposed to Jack a few methods to raise capital as following:- 1. Preference shares 2. Debentures 3. Ordinary shares 4. Bank borrowing Required: Explain the different methods to raise capital. Your answer should include the advantages and disadvantages of the methods. [8 marks]

Answer 1

Answer:

i)Preference share:

This these shares are having fixed return of profit dissimilar to the debentures this investors are likewise considered as the proprietor of the business as opposed to the bank so the profit on these shares are not the obligation but rather the profit dispersion yet at the fixed rate. it might be conceivable that preference shareholder don't get any profit as a result of non accessibility of sufficient profit on the off chance that these are aggregate, at that point they get such profit on one year from now.

Advantages :

• Leveraged earning without any obligation to declared profit or dividend.
• Do not to interfere into the administration or management of organization.
• convertible preference share can change over into equity share on the development date so the sum will accessible to the association for The unbounded period or infinite period.
• More attractive for the recently framed company since individuals don't have trust on such equity shares of new organization.
• It saves the organization from the unfriendly takeovers.
• Can be given or issued without any mortgage of asset.

Drawbacks :

• Exorbitant source of account when contrasted with debenture.
• Do not to profit the tax reduction
• Profit is commitment for the cumulative shares.
• They will have early case on the assets on the date of liquidation.
• Participative preference shareholders made weaken the privilege of equity investors.

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2)Debenture:

It is least cost source of account for any association however here the association needs to pay the interest on such debenture as a commitment since debenture holder is a creditor of the association instead of the proprietor of the association or organisation so if the association is making benefit or not the association needs to pay the interest on debentures so the debentures are more hazardous than preference shares.

Advantages :

• Least cost source of finance.
• Advantage of exchange on equity.
• Do not to weaken the privilege of equity investors in any circumstance.
• Having the tax reduction.
• Most simplest approach to fund for the new association and investor trust effectively
• Do not to have any interfere into the administration of the association.

Disadvantages:

• Most least secure source of Finance.
• Interest on debentures is obligation
• Burden on the assets of association.
• In downturn period it is a more terrible source of finance.
• No adaptability.

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3)Ordinary shares:-

​​​​​These investors are considered as genuine proprietors of the association since it just gets its income in the circumstance association is earning profit at the time of liquidation likewise the normal investors or ordinary shareholders get its payments at the last. Aside from all these it likewise reserve a Privilege to cast a ballot into the general meeting.

Advantages:

• Highly adaptable
• No obligation of profit
• No burden on the assets of the association.
• Genuine proprietors of the association at the time of liquidation they get the payment at last.
• Least most dangerous for the organization.

Drawbacks :

• Interfere into the administration or management of the organization.
• Greatest expense source of account.
• Doesn't have tax cut.
• Issue of new equity share weaken the privileges of the old equity holders
• Doesn't helpful for the new organization since individuals don't confide in new structures.
• Issue cost of equity is most noteworthy among all the financial options.

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4)Bank Borrowing :

It is fundamentally the same as debenture since it is likewise considered as a creditor of the association and interest on such bank borrowings is a commitment or obligation for an association to payable toward the finish of every year regardless of the profit of association.

Advantage:

• Do not to interfere into the management of association.
• Tax reduction is accessible.
• No issue cost.
• Interest rates are lower than the preference shareholder's profit so it is considered is less expensive source of Finance.
• Doesn't dilute the right of equity investors

Disadvantages:

• commitment of interest.
• Needs mortgage and creditworthiness..
• Exacting reimbursement plans.
• Prepayment punishment and charges
• Interest rate risk: assume you take credit at a specific interest rate and in this manner the interest rate in market decrease then you may confront  interest rate risk.
• Processing fee.