In fact all corporations must issue at least some shares to the owners of the business upon formation.
Generally speaking there are only 3 ways money can come into the corporation, selling shares (equity financing), taking on debt (debt financing), and revenue.
There are really no disadvantages to having corporate revenue as a source of funds so when talking about the advantages and disadvantages of equity financing it is in the context of comparing it to debt financing.
The basic advantages of equity financing are that the funds can usually be kept indefinitely, no payments are required on the funds (dividends may be paid out but only on earnings) and no collateral is required for equity investment. If these companies have been bankrupt because they were lose in their business, However they do not have to bear the pressure of debt, and reset their company easier
The basic disadvantages are that dividend payments are not tax deductible for the corporation, and the more shareholders a corporation takes on with equity financing the more shared control there is of the corporation (which can impose restrictions on how it operates), and the less profit there is for the corporation and its principal owners. These companies can be effected by changing of the world economic, Special about big companies were listed in Stock exchange they can met risk easier. Lehman Brothers is a victim of the financial crisis world recently. Companies rated investment from Wall Street filed for bankruptcy protection in September 2008 when the debts exceed 691 billion dollars more for the strength of the ownership company in New York as well as the investment bank North American was sold to Barclays British Bank, while even 80 affiliated companies of the smaller banks were closed.
In comparison, debt financing allows for tax deductions on interest payments, has little or no impact on control of the corporation and allows leverage of company profits.
I am quite disagree id there will be no disadvantages of having revenue as source of company's funds. I think that revenue could be the safest type source of funds for the business as this are basically based on the organisation's capability to raise sales and profits. However, I think this has its own risk as it thoroughly depend upon the market's demand toward the company's product or service. If there is a positive reaction, the company can fund theirself or the other way around which could lead to organisation' bankruptcy. As a result, I think haveing only one source of finance could be riskier rather than having two or more sources of finance to be backed up plan.
ReplyDeleteIn addition, is revenue actually part of equity finance?
Thanks.
Is that the only disadvantage for dividend payments are non tax deductible and impose restrictions on the operation?
ReplyDeleteHow about the traditional notion for the ownership problem of the corporation? Also, there are high cost represented for the return required to shareholders which satisfy them...
I agree with the first comment, in that I don't see revenue as a safe form of raising finance. As even with high revenues it doesn't always equal high profits, a company may need all it's revenue to cover all it's costs. Leaving little for profits to be put to capital use.
ReplyDeleteDo you think debt financing is a better form of raising finance that equity finance? It may reduce the dilution of control for your company, but the amounts of interest payments may be more than the duty of dividend payment you would have to pay in dividends.