9 - The use of debt finance

As covered in the blog of week 3, there are two methods that companies can raise finance, which are equity and debt. Equity finance is to issue shares by various ways, this means it is more risky compare to debt finance, and expecting a higher return as it requires a higher amount of funds to issue shares. Furthermore, through debt finance companies enable to find it lower cost and cheaper, as it is lower transaction cost and tax deductibility of interests, this means the company use debt finance expects lower returns with less risk.

In a contemporary business environment, there are many companies are using equity to raise their finance as equity finance is earlier to gain funds through issue shares in the stock market. However, there are still a number of companies using debt finance, for example, Japan based company of Sony, Sharp and Panasonic, they has announced that losing over billions due to technological edge and mass appeal and their share prices are also declining since 2009. They are well-known multinational businesses in the worldwide, and also a major employers and exporters in Japan. If these three companies collapse, it will cause a huge effect to Japan economy. Therefore Japanese government requested these three companies to borrow huge amounts of debt funding to keep them afloat.

Doubt these three companies were through equity finance to raise their capital, and the past evidences showed that their share prices has dramatically dropped since 2009, which demonstrates that if these three companies cannot perform well in next few years, the consequence of these companies will  collapse and cause Japan economy to downturn. Although using debt finance although companies need to repay interests of it and may cause a fall in share price, the debts take a number of years which determine it is a low risk compare to equity finance when facing to this situation. Also, debt finance enable to decrease the WACC over the time in order to generate a higher NPV profits as debt finance is cheaper than equity finance. As a result, Sony, Sharp and Panasonic’s share price may suffer an unoptimistic situation when using debt finance, but they may able to take advantages to changes their company’s capital structure.

8 - The impact of family business financing decision

Family business will be discussed in this weekly blogger. As covered in blogger 5, there was a banking crisis occurred in 2008. This will cause a huge effect to whom are doing family businesses. Firstly, economy recession appears while the banking crisis existed, it causes small-medium businesses face a difficult challenge to survive in their industry. Secondly, as banking crisis occurred, credit crunch will be existed, this means businesses are harder to gain bank loans, especially to small-medium businesses. Above factors indicate a problem that family businesses may face, raising capital.
 
Although most family businesses aim to grow faster, the recession left a impair mark, which causing some family businesses are either unable or harder to source finance and capital. There are two different situations that family businesses can choose. For example, if a family business is public companies, this means the business is able to raise capital through issuing equity to shareholder, which listing on stock market. Although it sounds like easier to get fund from public, the family business need to be transparency, which means that they requires producing documentation to public. In contrast, if a family business is private company they only can raise their capital through bank loans. However, due to the influence of recession, small-medium family businesses are remained restricted for availability of loans from bank.
 
 
Normally, family businesses do not produce any documentation as they are closed environments and protective of family secrets. In contrast, for those larger family businesses, although they are able to gain fund by issuing equity, they may need to aware of agency problems. Investor may not trust the family businesses with their wealth as the founding members or managers of family businesses may only server their own needs, which effect the growth of the business. However, in the situation of small-medium family businesses, they found borrowing loan harder as many banks feel business confidence was declining, which means the aim of growing and expanding their family businesses are not achievable .
 
 
The effect of recession has a huge impact to family businesses, and what will be the best method for those family businesses to run in contemporary business environment? As most of banks are restricted to lend funds to small-medium business, and the result of survey shows over 40% of applicants have been refused in each quarter this year, which means family businesses are not able to grow and invest, and it is frustrating that bank finance is still difficult to get.

7 - The failure of banking industry

To recall back to 2008 USA bank crisis, Banking industry was successful before 2008, it was determents as much profitable compare to other potential industries, such as oil, gas and coal, and global banking industry revenues were 6% of global GDP. However, there was no emphasis on corporate governance measures for financial institutions, and caused a banking crisis in 2008 which originated by Lehman Brothers. As a result of this, there were more than 465 banks have failed after 2008 banking crisis, some of banks are either nationalised, takeover or collapsed.

There are a number of reasons why causing the bank crisis happen. The management of  interconnection between the inherent business risk and remuneration was collapse. This was causing a problem between remuneration structures and bonuses, which encouraged excessive short-termism rather than focus on maximising shareholder's welfare, and also lack of prudent risk management and weaknesses in reporting on risk were serious problems as there were no one care about the risk. Therefore this indicates that banking industry was lack of corporate governance, and it was a main contributor to the financial crisis.

From a personal perspective, this is a question that why global banking industry revenues were 6% of global GDP, this is a strange issue that there was a lack of corporate governance measures for financial institutions. There should be more corporate governance compare to non-financial institutions. If there was existed a strong corporate governance in banking industry, people who working in banking industry cannot easier to achieve personal welfares (easier to let businesses and citizen to get bank loan in order to take more remunerations).