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"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".

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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.

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