Individual Project 5

Abstract

The paper discusses the concept of financing organizations in a holistic context. It explains the financing including the loans, bonds, stocks and preferred shares. The paper first explains the implications and evaluation of various forms of financial sources that are available to a business in general. It describes the equity financing including the preferred stock and common stock providing the advantages and disadvantages of this type of fund raising. The paper then describes the debt financing precisely focusing on loans and bonds along with the advantages and disadvantages of this type of fund raising. The costs associated with these different forms of fund raising are also discussed. The paper then concludes providing recommendations for the ACME project as to how the funds should be raised for its proposed overseas production facility.

Individual Project 5

Introduction

Most of the businesses begin life as proprietorships or partnerships, and if they become successful and grow, at some point they fine it desirable to become corporations. (Fromlet, 2001, pp. 63-69) A business requires generating funds in order to expand its operations. These funds can be generated by way of equity financing or debt financing.

Equity financing is a way of raising funds through the shareholder deposits or by shareholders with the purchase of shares. Equity financing involves initial public offerings (IPOs), issuance of preference shares and rights issue. Debt financing, however, depends upon external help rather than fund raised internally as in equity financing. The debt financing involves borrowing of money on which interest is paid.

Discussion

Implications and Evaluation of Financial Sources Available to a Business

As discussed there are two major ways through which a company can finance. (Jordan 2008, Pp: 15-45) Both of these major financial resources have different implications with them and the decision to finance the company depends on the situation and different scenarios that a company is facing. Following are the implication with each type of financing

Equity financing

There are two fundamental ways of raising equity finance; the issuance of the company stocks to the venture capitalists or investors, and by publically offering company stocks to the investors. When capital is raised through equity financing it involves the selling of partial interest in the firm to the shareholders. The shares are classified as:

Preferred Stock

Preferred Stock are those that are part of the equity of the company, its possession is entitled to the profits of the company, to a certain amount, the assets of the same. In the event of liquidation, there are also profits to a certain amount (Nofsinger, 2008, Pp.11-55).

Common Stock

The shareholder has a residual interest on profits and assets of the company, after priority claims satisfied by the preferred stockholders.

In both types of actions you can omit the dividend, the two are part of the equity of the company and both have an expiration date. To choose an action type or another, take that which is the most appropriate source of long-term resource for investors (Robinson, 2006 pp. 28-29). To sell their shares is through a ...