What are the different ways of raising equity capital? What are the - 30156

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Discuss the advantage and disadvantages of debt financing for a private company. How does the existence of collateral affect your response? How does the relative age and maturity of the company factor into your analysis? How does the debt affect the balance sheet, cash flow and income?

 

What are the different ways of raising equity capital? What are the advantages and disadvantages of each? How does the relative age and maturity of the company factor into your analysis? How does the equity affect the balance sheet, cash flow and income?

 

Discuss the similarities and differences between Asset-Based Lending, Factoring and Mezzanine Capital. Under what scenarios would a company choose each? Would they ever  choose one over the other two every time? If they chose all 3 in varying degrees, how would that occur?

If a Company has a Weight Average Cost of Capital of 17%, consisting of:

·         VC equity (40% of equity)

·         Owner/Operator equity and

·         Bank debt (60% of assets, 8% effective interest rate, 30% tax rate)

What is the expected return of the VC equity?

Solution Description

 

Question No. 1

 

Debt is the additional financial support received by the companies from the external parties and debt financing can be a bank loan to bond financing. Also, debt financing can be for short term period to support the working capital or it can be a long term for the purchase of assets or for project financing. Debt financing help the companies to obtain financing without losing the ownership of the company as debt provider is the lender and will not get the voting rights. Moreover, interest on the loan is tax deductible and the companies get tax advantage on debt financing. Also, the effective cost of the debt is lower than the equity financing.

 

Debt financing require payment after regular intervals or at a specified time for the interest and loan amount, the repayment will eventually impact on the cash flows of the business. Increasing debt financing will impact on the credit risk of the company and risk of default will increase. As a result of this, the overall credit ratings of the company will be affected and new finance will become more costly as the lender will require the compensation for the extra credit risk. Collateral is the important factor in the financing and it is required as a security. In case of default, the lender can recover the debt by selling the collateral.

 

The debt cost is dependent on the relative maturity of the company and if the long term debt has higher debt cost due to higher risk of default and the short term debt has lower risk of default as a result have lower cost as compared to the long term debt. Moreover, debt will help to increase the business volume and it will result in increase in assets and liabilities at the same time. As a result the business structure will increase and the debt structure will also increase at the same time. Increase in the business volum

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