Question

There are many approaches a corporation or company can use to raise capital. Based on the resources for this module, explain how a company can raise capital through the issuance of equities. Include the advantages and disadvantages of the methodology.

Think about the Fortune 500 company you will be making recommendations for in the final project. As the CFO of the JP Morgan, would you recommend the issuance of equities to raise capital? Explain why or why not.

Answer 1

What Is Equity Financing?

Equity financing is the process of raising capital through the sale of shares. Companies raise money because they might have a short-term need to pay bills or they might have a long-term goal and require funds to invest in their growth. By selling shares, they sell ownership in their company in return for cash, like stock financing.

Equity financing comes from many sources; for example, an entrepreneur's friends and family, investors, or an initial public offering (IPO). Industry giants such as Google and Facebook raised billions in capital through IPOs.

While the term equity financing refers to the financing of public companies listed on an exchange, the term also applies to private company financing.

ADVANTAGE -

• Less burden. With equity financing, there is no loan to repay. The business doesn’t have to make a monthly loan payment which can be particularly important if the business doesn’t initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.
• Credit issues gone. If you lack creditworthiness – through a poor credit history or lack of a financial track record – equity can be preferable or more suitable than debt financing.
• Learn and gain from partners. With equity financing, you might form informal partnerships with more knowledgeable or experienced individuals. Some might be well-connected, allowing your business to potentially benefit from their knowledge and their business network.

DISADVANTAGE-

• Share profit. Your investors will expect – and deserve – a piece of your profits. However, it could be a worthwhile trade-off if you are benefiting from the value they bring as financial backers and/or their business acumen and experience.
• Loss of control. The price to pay for equity financing and all of its potential advantages is that you need to share control of the company.
• Potential conflict. Sharing ownership and having to work with others could lead to some tension and even conflict if there are differences in vision, management style and ways of running the business. It can be an issue to consider carefully.

Deciding Factor

• If your creditworthiness is an issue, this could be a better option.
• If you’re more of an independent solo operator, you might be better off with a loan and not have to share decision-making and control.
• Would you rather share ownership/equity than have to repay a bank loan?
• Are you comfortable sharing decision making with equity partners?
• If you are confident that the business could generate a healthy profit, you might opt for a loan, rather than have to share profits.

As the CFO of JP Morgan Co., I first evaluate the above deciding factor. If it is favourable for issuance of equities then we go for issuance of equities else we opt for debt financing.

If we are assure that return from investment is more than the cost of debt then we should go for Debt financing instead of Equity financing. Reason is that the extra gain would be beneficial to the existing shareholder & ultimately the market value of share increases.