In terms of Commercial Company Law, a public listed entity is an entity which is trading on a recognised stock exchange of a country like Dubai Financial Market (DFM). The public company has its share trading and there is no restriction on share transfer of the company. There are various sources through which a public listed entity can raise finance from the market. The same has been highlighted here-in-below:
The detailed analysis of the aforesaid five external factors of finance has been presented here-in-below:
Grants are financial aid or help that are provided by the government to promote a particular type of business or activity in a particular area or to promote industrialisation in the country. They are provided to support core activity of business and is intend to improve the bottom line of the business. The aid is provided to ensure employment growth, creation of job opportunity in the economy and improving the standard of living. Further, the grant is also provided to promote Medium and Small sized enterprises in the economy.
Advantages of Raising Finance through Government Grants
The chief advantage of raising finance through government grant has been highlighted here-in-below:
Disadvantages of Raising Finance through Government Grants
When to be Sought
This mode of financing is one of the most common form of external financing in the investment world. This is used to procure funds when credit rating are good and the debt to equity ratio is low. Further, the interest on debt is tax deductible and is commonly used for trading in equity. Debt financing can be available for short term and long term as per need of the organisation. Further, debt can be raised from public or banks depending on needs of the organisation. (Entrepreneur Media, Inc., 2018)
Advantages of Raising Finance through Debt Financing
The chief advantage of raising finance through Debt Financing has been highlighted here-in-below:
Disadvantages of Raising Finance through Government Grants
When to be Sought
Under a Venture Capital, a public listed entity not only receives financial support in the form of funds for procurement of assets or expansion of business but also non-financial support in the form of advisory and technical knowledge and skills. (EduPristine, 2017)
Advantages of Raising Finance through Venture Capital
The chief advantage of raising finance through Venture Capital has been highlighted here-in-below:
Disadvantages of Raising Finance through Venture Capitals
When to be Sought
Under this method of financing, company typically stake in the assets of the company by selling equity to business angels for funds. The amount raised through this medium is modest (typically ranging from Sterling 10,000 to Sterling 5,00,000/-)
Advantages of Raising Finance through Business Angels
The chief advantage of raising finance through Business Angels has been highlighted here-in-below:
Disadvantages of Raising Finance through Business Angels
When to be Sought
It is a medium term of finance that helps business to procure assets without outlaying a huge sum of money upfront. This helps business to maintain its working capital requirement. (efinancemanagement.com, 2018)
Advantages of Raising Finance through Leasing
The chief advantage of raising finance through leasing has been highlighted here-in-below:
Disadvantages of Raising Finance through Leasing
When to be Sought
Weighted Average Cost of Capital
The term Weighted Average Cost of Capital can be defined as the hurdle rate or the minimum rate of return required by the seeders of finance to the project of the company. It may be also be defined as the compensation rate desired by all investors of the project. The computation of Weighted Average Cost of Capital is computed on the basis of return required and the weight of the factors. (CFI Education Inc., 2018)
The formula for computation of Weighted Average Cost of Capital has been presented here-in-below:
WACC= ((E/V)*Re)+ [(D/V)*Rd)*(1-T)]
E= Market Value of the company Equity;
D= Market Value of Debt;
V= Total Market Value of the company;
Re= Cost of Equity;
Rd= Cost of Debt;
The WACC of capital is influenced by the source of financed is explained here-in-below through an example presented here-in-below:
Suppose XYZ wishes to raise funds through the market to the tune of Sterling 1 Million. The same shall be funded through issue of equity and debt. The proportion of debt and equity in the proposed funding has been taken at 60% and 40% respectively. The cost of debt is taken at 6% and the cost of equity is taken at 18%. Further, let us assume the tax rate prevailing in the economy is 25%.
As interest on debt is tax deductible, the cost of debt shall be 6% *(1-25%)= 4.5%.
Further, the cost of equity is not tax deductible and the same shall be taken at 18%. The computation of Weighted Average Cost of Capital is detailed here-in-below:
WACC= ((E/V)*Re)+ [(D/V)*Rd)*(1-T)]
E= Market Value of the company Equity;
D= Market Value of Debt;
V= Total Market Value of the company;
Re= Cost of Equity;
Rd= Cost of Debt;
T= Tax Rate
WACC= 4.5%*.4 + 18%*.6=1.8% +10.8%=12.6%
If the proportion of debt is increased to 50%, then Weighted Average Cost of Capital is presented here-in-below:
WACC= ((E/V)*Re)+ [(D/V)*Rd)*(1-T)]
E= Market Value of the company Equity;
D= Market Value of Debt;
V= Total Market Value of the company;
Re= Cost of Equity;
Rd= Cost of Debt;
T= Tax Rate
WACC= 4.5%*.5 + 18%*.5=2.25% +9%=11.25%
Thus, the WACC is reduced as more debt is added to capital. Hence the above deduction is proved.
References:
CFI Education Inc., 2018. Definition of WACC.
EduPristine, 2017. Venture Capital. [Online]
Available at: https://www.edupristine.com/blog/venture-capital
[Accessed 13 November 2018].
efinancemanagement.com, 2018. What is a Lease or Leasing?. [Online]
Available at: https://efinancemanagement.com/sources-of-finance/advantages-and-disadvantages-of-leasing
[Accessed 13 November 2018].
Entrepreneur Media, Inc., 2018. Debt Financing. [Online]
Available at: https://www.entrepreneur.com/encyclopedia/debt-financing
[Accessed 13 November 2018].
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