• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

"Describe and compare the alternative methods that companies can use to raise capital in the various capital markets. Include in your discussion the advantages and disadvantages for the companies and investors and the role of intermediaries".

Extracts from this document...


University of Essex Department of Accounting, Finance and Management AC302 Corporate Finance "Describe and compare the alternative methods that companies can use to raise capital in the various capital markets. Include in your discussion the advantages and disadvantages for the companies and investors and the role of intermediaries". 1) Describe and compare methods of capital raising in various capital markets 2) For each of the methods evaluate the advantages and the disadvantages to: - Companies - Investors - The role played by intermediaries in raising capital Word count: BA Accounting and Management 1. Introduction Bodies, Kane and Marcus (2002) suggest that "Financial markets are traditionally segmented into money markets and capital markets" Sources of finance from money markets are described as short-term, cash equivalents usually marketable, liquid meaning easily transferable to cash, low risk debt securities. These include treasury bills, commercial papers, bankers acceptance and alike. In our discussion however we will be focusing on capital markets which are in contrast to the former in that they are longer-term more risky securities. Capital market instruments can be further divided into four categories, debt markets, equity markets and derivative markets which constitute options and futures contracts the latter we will only be discussing in short since derivatives are risky speculative income, far more suited for risk hedging. 2. Debt markets Debt markets provide a means of long term borrowing for a number of parties including corporations, government agencies, municipalities and special trusts. Debt instruments can be classified as secured, unsecured, tax exempt, convertible debt, publicly issued or privately held. The classification of debt instruments depends on the intrinsic nature of the debt the "market they are issued, currency they are payable in, protective features and their legal status"1. ...read more.


We discuss some of the advantages and the disadvantages in going public to both companies and investors. 3.1 Advantages to company. See Brigham and Gapenski (1985:471) Going public raises further capital, in relation to private placements shares are usually priced higher on a public market. By going public it "makes common stock negotiable and creates a visible market"4 this further creates value to stocks because of enhanced liquidity, also by being public, corporation become more flexible in gaining further equity capital "more quickly and more cheaply"5. The image of the firm is further enhanced as the firm goes public as it represent a new development of the organizations life, going public also increases visibility to global investors who wish to invest in a well diversified portfolio. It is not uncommon for firms to grow by acquisition as a result of share considerations, thus going public allows merging of interest and integration. Furthermore going public increases liquidity, compared to privately held securities that are not exchanged on a global market or over-the-counter markets which are said to be "illiquid"6 were potential buyers don't always exist. 3.2 Disadvantages to companies There are a number of disadvantages to going public, firstly a public firm is subject to disclosure requirements that govern the reporting to shareholders, thus reports must be filed with SEC (Securities and Exchange Commission) in US and London Stock exchange in UK, management are likely to be reluctant to make such information public since it would be available to competitors and predators. Management are usually faced with the pressures to pay dividend to shareholders this may not always be the best option as reinvestment in healthy projects may be a lot more profitable in the long term. ...read more.


4.4 Disadvantages to investors Using options and other strategies investors are placing all or some of the capital at risk, this is in exchange for extraordinary capital gain. Thus such strategies are inappropriate for risk-averse investors. Conclusion Our discussion has factated a number of areas of corporate fianace specifically upon the the benefits and deficiencies beared by companies when making long term fianancial decisoions, investors are also significant since they have a perfect choice to where and whom they invest in thus companies when making financial decisions should take into consideation the investors choice and needs. Companies that wish to raise long term finance can do so by access to efficient capital market, they can choose to sell additional debt, sell equity or sell the assets of the company, the latter we have not discussed. 1 http://www.finpipe.com 2 Bodie et al (2002) p40 3 http://www.finpipe.com 4 Douglas R. and John D. (1997) Corporate Finance and Management, Prentice-Hall pg 748 5 Douglas R. and John D. (1997) pg 748 6 http://www.amerigopartners.com/initial_public_offering.htm 7 Pike R and Neale B (1996) Corporate Finance and Management: Decisions and Strategies Second Edition, Prentice Hall pg 478 8 Carter, R and Manaster, S 'Initial public Offering and the Underwriter Reputation' Journal of Finance September 1990 9 Douglas R. and John D. (1997) pg 734 10 Hull (1998) pg 12 11 Bodie et al (2002) p55 12 Hodgson A. (1999) Derivatives and their Application to Insurance: A Retrospective And Prospective Overview, The Changing Risk Landscape: Implications for Insurance Risk Management, AON 13 Douglas et al (1997) pg 843 14 Hull J.C (1998) pg 13 15 http://www.institutdesderives.com/guide_suite_en.php. 4 April 2003 ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. How should a limited company value its fixed assets to best inform those who ...

    Companies must be aware of these factors to ensure their fixed assets valuations and reporting systems provide useful information to users of its financial reports. One of the problems associated with this valuation method is the potential for inaccuracies in the balance sheet due to the lack of consideration and

  2. Drakensberg Limited Case Report. The main problems are whether to launch a new product ...

    though the output has been adjusted. b. Value chain analysis Value chain analysis is introduced here to identify Drakensberg's core competitiveness and present some proposals to enhance the competitive advantage and maximize the shareholders 'value. As Porter (1985)stated: the value chain comprises the primary activities and support activities.

  1. Investment appraisal methods. Evidence[1] suggests that, NPV (net present value), IRR (internal rate of ...

    However, there can be ranking conflicts between NPV and IRR in the cases of two mutually exclusive projects in some circumstances, which makes us consider which method is preferred between NPV and IRR. Generally speaking, NPV is more preferable than IRR in several ways.

  2. Accounting note 1

    and any particular assets. The ownership claims are general, not specific. 5. Cash $ 50 Account payable $ 500 Inventory Paid-in capital 1,000 ($300 + $500) 800 Retained earnings 150 Equipment 800 Total $1,650 Total $1,650 The meaning of retained earnings was explained above.

  1. This report will incorporate an analysis of Blackmores LTD including, the level of leverage ...

    5.3 Relevant Company Characteristics to its Dividend Policy Blackmores constant earnings growth has allowed the general increase of dividends each year and such a dividend policy promotes higher share prices (Ross, Westerfield and Jaffe, 2009). This concept, known as the Dividend Signaling Theory, allows for BKL's management to signal to

  2. Accounting Final Project - analysis of three companies in the UK telecommunication sector.

    Inflation affects the purchasing power of households and hence the higher the rate of inflation the lower the consumption of the services offered by the companies in the telecommunication industry. Interest rates affect the company?s ability to raise more funds for its operations and other expansion programs.

  1. Capital budgeting: advantages and limitations

    capital expenditure is expected to benefit the firm for a period of time longer than a year whilst capital budgeting is the process of generating, evaluating, selecting and following up on capital expenditures. 2.2 Capital Budgeting Process There are different sequential stages in the capital budgeting process.

  2. Free essay

    The purpose of this coursework is to collect stock data, use statistical tools and ...

    to 13.3 (Rio Tinto) which means that our shares were riskier than the index. 3. Correlations between stocks and the market FTSE 100 1.000 BT Group 0.503 1.000 Admiral 0.425 0.257 1.000 Vodafone 0.604 0.408 0.348 1.000 BTI 0.560 0.290 0.251 0.255 1.000 HSBC 0.557 0.456 0.318 0.148 0.458 1.000

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work