It is commonly known that money is very important in one's life. Without money, it is very difficult to survive in this world that is increasingly developed. So does the business. Without enough money, how individual could run the business. Money in the sense of business normally is capital. A firm might needs the sufficient capital or even more money to run the business. Therefore, a firm needs to generate or increase the company's financial as to secure for long term period. Most people might think it is easy for a company to get money in order to stabilize or enhance the company's financial. However, this is the reality- that companies require to use several methods and go through several processes which they might have to concern if they want to improve the company's finances in order to sustain their business.
Therefore, based on this week’s lecture, there are some matters will be discussed throughout this blog-that a firm probably the management, needs to considered a several methods and processes they have to go through in order to raise the corporate finance. First of all, managers might need to consider the shareholders’ value where their shareholders always expect to get a high return on their investment. So, a firm possibly requires achieving an appropriate rate of return for the investors so that it will be easy to get the new funds from them as they are happy with the performance of firm’s activities and the possible high of return they might get from it. It will be good if the firm could have the lower cost of capital or cost of finance and get the higher return for the investors.
A firm could raise the capital or finance probably by two types that are long term equity finance and long term debt finance. Long term equity finance is by selling the ordinary shares to new investor perhaps via the stock exchange, or sells the shares to the existing shareholders in the firm that involve various issuing methods such as offer for sales, placing, tender offer and stock exchange introduction. So, as the ordinary shareholders, they probably have the rights towards the firm in terms of any rewards or returns or compensation as the definitive bearer of firm’s risk. Before a firm can sell its shares, the shares need to be quoted in the stock market which the firm also needs to fulfill the several listing requirements that set by UKLA Listing Rules so that it would be easy to get new long-term funds in future, however, to gain the stock exchange quotation probably costly, so as alternative, a firm may sell the shares in terms of right issue which is more cheaper of issuing costs to the existing shareholders first before offer to other investors.
Contrast to long-term debt finance, debt itself explain to something that needs to be paid back. The method of repayment might be through the negotiation period of repayment or pay total of debt at the end of borrowing. This includes several types of long term bonds (debentures or loan stock), international debt finance (eurobonds) or borrow from bank and other financial institution. For instances, Business Times News (2013) reports that, Multi Agro Gemilang Plantation in Jakarta, Indonesia is using a bank loan to build its second palm factory as its financial provider to raise the capital of its development in order to earn more profit. This shows that this company is using long-term debt finance in order to improve its finance thus to increase the shareholder's wealth. Possible reasons why they have chosen this type of finance because it is a low legal costs and administration which also more cheaper of issuing costs than equity finance with lower of investor risk. They also might get the funds quickly as the bank loan process could be simple and more flexible where they can negotiate with the bank in terms of repayment of loan without penalty if the firm does a good performance than they expected.
As a summary, there are many ways in order to raise the corporate finance with such various characteristics, advantage and disadvantage of long-term equity finance and debt finance that a firm could choose or consider perhaps also concern in maintaining the shareholder's value.
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