Question

Discuss 4 advantage why company issue equity capital (500words)

Eventual repayment

No fixed cost to repay

Huge amounts can be raised

Reduce risk

Answer 1

Equity is one of the sources of capital among many sources like bonds, debentures, bank loan, preferred share etc. When a company goes to raise money from issuing equity, the first time it raises capital it is called IPO and the next time it raises capital by issuing share, it is known as FPO. There are many benefits of raising capital by issuing capital through equity.

· Eventual repayment: Unlike debt there is no maturity for equity. The equity as an instrument is said to be perpetual and there is no fixed data where the shares will mature and the company will pay back. The equity holders are said to be the owners of the company and they are paid last however they are paid in different forms. The company pays dividend to the equity holders and normally dividend grows. The company can also pay stock dividend to the company and the company can buy back the share also. Buy back of share is another way of payment to the equity holders of the company.

· No fixed cost to repay: The company when issues share does not guarantee that there will be fixed payment. Unlike debt where the company has to make the interest payment and if it does not bankruptcy can arise there is no payment obligation on the equity holders because they are considered to be the owners of the company and are paid at the last. The dividend payment is also paid from the net income and after considering the capital expenditure requirement of the company.

· Huge amounts can be raised: The equity as a source of capital is also preferred because of its scope to raise funds. Through equity a large amount of funds can be raised which is not possible through other sources like debt because no bank would be willing to take that much risk at once. The reason why it is possible to raise such large amount from debt is that because you are able to distribute the ownership among large number of shareholders and people expect that when the company will be profitable everyone will benefit from it and they will get capital gain as well as dividend gain.

· Reduce risk: The cost of equity as a source is higher than other cost but if you look at it from a risk management perspective the risk is low by raising money through equity than raising money by debt or other instruments. That is because there is no obligation to make fixed payment to equity holders and if in certain years you are not able to generate profit then you can opt to not pay dividend in that year and for further years also. Even if you want to reinvest the earnings in the company you can easily do but that is not the case with debt, if you fail to make the payment with debt then bankruptcy situation can arise and creditors file litigation to claim the assets of your company.