Sources of Funds case - Essay Example

Sources of Funds Nike Inc. is an international distributor and marketer of footwear, apparel and equipment for use in the athletics. It has been the leading US-based firm in the athletic supplements industry. Currently, the company is planning to expand by opening more branches globally. This will force the firm to source for funds to finance its new project. The purpose of this essay is to explain the best possible sources of funds of Nike Inc, and the attractiveness of its shares to the prospective investors.

The two best sources of funds for this company are debt and equity. Equity can be generated internally as retained earnings or generated externally generated as common share capital. A company may choose to use its retained earnings to expand its operations. This is because the cost of retained earnings is relatively lower compared to the cost of common share capital. The major drawbacks of this source of finance are that it is usually inadequate, and its use can easily expose a company to liquidity problems.

Consequently, a firm can source equity through issuing of common shares. This source of funds confers several advantages. The first advantage is that this form of financing is a permanent source of capital because common shares have no maturity date. The company does not have any liability for cash outflows linked with the redemption of the common shares. This facilitates financing of long term projects. Secondly use of equity lowers the gearing level hence a company has a broader borrowing capacity.

Thirdly, the shareholders may provide valuable ideas to the company’s operations. However, this method faces various drawbacks. First the floatation costs are higher than those of debt (Pratt, 2010). Secondly, equity is only accessible to companies that have fulfilled the capital markets authority requirements. Thirdly, it can lead to dilution of ownership of control of the firm by the shareholders. The second method of raising capital is debt capital. This form of capital can be in the form of debentures and corporate bonds.

This source of funds confers several advantages. Firstly, the floatation costs are lower than those of common share capital. Secondly, since the interest on debt is tax allowable then the company enjoys a tax saving. This method of raising capital also faces various drawbacks. Default in payment of principal and interest can force a company into liquidation. Secondly, Providers of debt capital impose conditions, and many restrictive covenants hence it is not flexible. Suppose I have $100000 in my bank accounts, I may opt to buy the shares of the Nike Inc.

this is because: Firstly, Nike Inc has the greatest market share in the industry and this provides substantial certainty as concerns the future earnings. This also promises constant earnings or dividends to its shareholders (Hiriyappa, 2008). Secondly, Nike Inc. has considerable prospects for growth. This is evident through the information that the company has given to the public that it wants to undertake massive expansion. This will lead to increase in share price thus gain to the investor.

The information about the future prospects of the company is also available through management interviews (Thomsett, 1998). Thirdly, from the financial statements of the Nike Inc. it is clear that the company is attractive to potential investors. From the Income statement, over the years Nike Inc. has been the industry leaders in all its profiteering activities. The asset base for this company is also high thus efficiency in its operations. This is a significant incentive to its investors. In conclusion, Nike Inc.

as an expanding company may require raising more capital to finance its upcoming projects. The two best options available for raising funds are debt and equity. The company can also decide on the most appropriate finance mix of debt and equity. This will depend on floatation costs and cost of capital. ReferencesHiriyappa, B. (2008). Investment Management. New Delhi: New Age International (P) Ltd. Publishers.Pratt, J (2010). Financial Accounting in an Economic Context. Hoboken: Wiley.Thomsett, M. C. (1998).

Mastering Fundamental Analysis. Chicago: Dearborn Financial Publishers.