Question

Suppose that an organization wants to set up a multi-billion naira investment, Advice the company on how to raise capital for the investment

Answer 1

The company can raise funds through external sources of financing. The external source of financing includes Equity financing, Debt financing or Preferred stock financing.

Equity financing: A company can raise funds through equity financing. In equity financing, the company issue the equity shares in the general public and raise the funds required. The issuance of equity shares will decrease the ownership percentage of existing equity shareholders. It also decreases the market value of the share.

Debt financing: A company can raise the funds through the debt financing as well. In debt financing, the company can raise the funds by issuing the long term bonds in the market. The issuance of bonds will increase the fixed financial charge of the company and this will decrease the net income of the company. The interest on bonds is the tax-deductible expenses and the issuance of bonds does not affect the ownership percentage of existing equity holders.

Preferred stock financing: Issuing preference shares to raise the funds is also an option for the company. A company can raise funds by issuing the preference shares and the company needs to pay the dividend at a fixed rate. The Preference holders receive certain rights as well. The preference holder will receive the dividend before the equity holders. The preference holder has no voting rights.