FUNDING FOR ANDY
AMERICAN INTERCONTENTIAL UNIVERSITY
This paper focuses on the three types of funding for Andy for his business and which one out of the three is best for Andy.
So the main problem for Andy is to find out appropriate source of financing for his project. He can have many options available in the form of equity and debt to finance his plan mainly due his good reputation and financial performance in the past years. The three best options of funding for Andy would be:
1. Common equity
3. Bank Loan
Common equity: It is a form of financing where a company raises funds from the public by giving him/her a share of ownership ...view middle of the document...
Here a mix of all the option discussed above can help Andy to increase his earnings per share instead of choosing any one of them. But the main decision would lie based on the risk preference of Andy for its business.
Advantages and disadvantages of all the three options discussed above are:
1. Common Equity: There are following advantages of using common equity as a financing option:
(a) No obligation to repay the money: Common equity is considered as the easiest way to finance the fund. Even if the company fails to deliver the desire result it has no obligation to repay the money collected through this financing mode.
(b) A best option for new plans: As the investors who invest in the equity generally seeks growth opportunity and a good idea can turn them on to put their money into the business and this is the reason it is considered as the best option for the new business plans.
Following are the disadvantages of using the common equity as a source of financing:
(a) High risk: There is a high risk associated with the equity financing. As it is known that the common equity can be tradable in the market and if the company can't perform as per its projection the share holders has the right to change the management and at the same time the shares can be sold to the competitors and hence the company has a risk to be taken over by the competitors.
(b) High cost: Issuing common equity is a costly affair. It is considered to be most costly mode of financing for the company.
2. Debenture: Following are the advantages of raising funds through debenture financing:
(a) Tax benefit: Interest charged on the debentures is deductible in determining taxable income of the company and hence it can increase the wealth of the shareholders by giving tax benefits.
(b) No voting rights: The debenture holders have no right of voting and hence they are not entitled to interfere in the business decisions of the company.
Following are the disadvantages of debenture financing: