3 - Raising capital

Raising equity capital is essential to all companies, and I think it is a good opportunity to all companies, it is due to the benefit of increasing fund to business and thus they could have more opportunities to explore and develop new project and make more profits. However, how a company make sure that they could consider both raising equity capital and earn more profits? Therefore they need to look at cost of finance and decide which project to go with. There is no debate that lower cost of finance with higher rate of return is the best choice to company. If cost of finance is higher than rate of return means the company may lose their profit in achieving the project. Nevertheless, if a company has a strategic long term plan, they may adopt to lose first few years and they believe that they could earn back their profits few years later. Take, for example, Amazon was only selling books online, and the company started to sell other multi-product line, it was not successful as their main competitor eBay has the most market share of the industry. After few years, Amazon was going well and now Amazon becomes the largest online retailer.

There are a number of methods to raising capital, the most common method is to through equity. Companies need to issue ordinary shares to public, and they are available to raise their capital. Through this method companies could gain advantages, which are no obligation to pay dividends and the capital does not have to be repaid. As company does not have duty to pay dividends, if the company is doing worse in a year and therefore the company does not have a problem of finding fund to pay dividends, and issuing ordinary shares are not same as debt, the company does not need to repay it. However, if companies want to using equity to raise capital, they need to list on stock market first, which means it would be a high cost to companies, and companies also need to issue shares mean that they will loss of control and thus it may deal some problems in the future such as external equity provider may want to appoint other directors rather than internal management team.

Another common method of raising capital is to through debt finance, such as bonds and bank loan. debt finance is long term contract. This sort of financing is different to equity finance, debt finance has to be repaid. The advantages of using bonds are interest expense lowers the effective tax rate for issuers, and companies are unlikely to loss control compare to the use of equity finance.