Question

The three capital formation processes for a business are direct transfer, indirect transfer through investment bankers, and indirect transfers through an intermediary. Assume you are a small business owner who needs funds to expand your business. What are the typical source(s) of capital for these individuals and which of the three capital allocation methods would be utilized? Now assume you are a large corporation with plans to build a new factory. What are the likely sources of capital the CFO would pursue? Which of the three capital allocation methods would be utilized

Answer 1

Typical sources of funds to expand your business in a small set up are (1) own funds (2) debt from banks and financial institutions (3) Financing from venture capitalist. out of three capital allocation method, method of indirect transfer throrugh intermediaries would be preferred because in it indirect transfer can be made through a bank, an insurance company, or a mutual fund. The intermediary obtains funds from savers in exchange for its securities

Typical sources of funds to expand your business in a large set up are (1) issuance of common stock and preferred stock (2) Issuance of debt instrument (3) Borrowing from financial institution. out of three capital allocation method, method of Direct transfer & indirect transfer throrugh Investment banker would be preferred because in funds would be obtained by issuing securities directly to public or to investor bankers as colleteral