Capital in Manufacturing and Mining, Essay Example

Assume that you are financial advisor to a business. Describe the advice that you would give to the client for raising business capital using both debt and equity options in today’s economy.

Let us start by covering debts financing. Any business will always use a portfolio of both debts and equity to diverse their investments. Debt financing include getting loans from lending institutions. If a company is looking to raise cash through debt, some of the instruments to use in the short term financing are bank overdrafts, bills of exchange commercial papers and factoring. For medium term financing, firms can use bank loans, leases and credit sales or hire purchase. Long term financing after calculations of leverage ratios, firms can issue corporate bonds, purchase debentures or loan facilities that are more than run for more than a year (Robb & Robinson, 2014). An example is that firms that invest in capital projects like factory construction or real estate’s usually use debt financing and may be later issue rights in their share after going public.

Using equities to raise business capital is the most common form of financing for firms. Companies can do this by going public or looking for venture capitalist to invest in their business (Feldstein, 1983). A company can also hold a rights issue to raise additional capital. A rights issue is usually successful when the issuing firm has a profitable track record that convinces the existing shareholder of the firm to buy additional shares. For technological start-ups companies’ using venture capitalist is a much suitable option of financing. Venture capitalist equities usually have the option of converting into preference or ordinary shares upon going public.

Summarize the advice that you would give the client on selecting an investment banker to assist the business in raising this capital.

Hiring an investment banker is essential in realizing profitable investments while mitigating risks that are associated with balancing and selection of investment options to create profitable investment portfolio. It is therefore paramount that one carefully selects an appropriate and fitting investment banker. There are five important elements to be considered when selecting an investment banker.

Background and Basic Knowledge

It is important that an investor understands the background and basic knowledge on the investment banker. this is essential in understanding the processes employed by the investment banker

1. Chemistry with the banker to build understanding and clarity
2. The banker should idealy have solid experiences and connections with venture capitalists

• Clearly defined investment banker’s motives relative to one’s own

1. An investment banker who considers the client as a partner(Creamer, Dobrovolsky, Borenstein, & Berstein, 1960)

Explain the historical relationships between risk and return for common stocks versus corporate bonds. Explain how diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course.

Common stocks or ordinary shares as they are called are usually the most financing option for businesses. Any rational investor will look at the risk in the investor and judge the return expected. As the norm goes, the higher the risk the higher the return expected. An equities investor will usually look at the uncertainty in future stream of income and the possibility of the company going burst leading to a possible capital loss (Creamer, Dobrovolsky, Borenstein, & Berstein, 1960). The return on common stock can be viewed in two perspectives. The investor can either settle for an annual dividend income or either reinvests dividends and realizes a capital growth on the share price.

Corporate bonds have a considerable risk of default hence usually charges a higher interest/coupon rate as opposed to treasury bonds. Infrastructure bond issued by construction companies is an example of corporate bond. The risk is risk of default while return is on coupon payments and a final principle amount on maturity of the bond.

The two stock prices are negatively correlated. Almost a perfect -1 correlation is achieved hypothetically. Investing in both shares reduce the exposure risk. The fall in price in stock B is compensated for by rise in price of stock B.

In conclusion, any business will always use a portfolio of both debts and equity to diverse their investments. Venture capitalist equities usually have the option of converting into preference or ordinary shares upon going public. Any rational investor will look at the risk in the investor and judge the return expected. The risk is risk of default while return is on coupon payments and a final principle amount on maturity of the bond.

References

Creamer, D., Dobrovolsky, S. P., Borenstein, I., & Berstein, M. (1960). Debt and Equity Financing. In D. Creamer, S. P. Dobrovolsky, I. Borenstein, & M. Berstein, Capital in Manufacturing and Mining: Its Formation (pp. 156-191). Princeton: Princeton University Press. Retrieved June 5, 2014, from http://www.nber.org/chapters/c1393

Feldstein, M. (1983). Inflation and Taxes in a Growing Economy with Debt. In M. Feldstein, J. Green, & E. Sheshinski, Inflation, Tax Rules, and Capital Formation (pp. 44-60). Chicago: University of Chicago Press. Retrieved June 5, 2014, from http://www.nber.org/chapters/c11329

Robb, A. M., & Robinson, D. T. (2014). The Capital Structure Decisions of New Firms. The Review of Financial Studies, 153-179. Retrieved June 5, 2014, from C:\Users\Morgul Empire\Downloads\Documents\Rev. Financ. Stud.-2014-Robb-153-79.pdf