Capital markets - Essay Example

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For any company to fund its growth, any continuing corporation must have sourced for funds from somewhere. Apart from trade debt and bank, the key sources of financing include debt securities, plowback, private equity and equity securities (Yartey, 2006).
Debt securities-A…
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Download file to see previous pages sically is a promise to pay back the face value of the bond on maturity together with making periodic interest fees known as coupon rate (Palmiter, 2009).
Plowback-Earnings is another important source of new funds which corporations use on capital projects. Instead of paying out dividends to shareholders, a company may decide to plowback the profits made back into the corporation. Plowback is basically reinvesting profits back into the business. It is an attractive way of raising capital since it is usually subject to the control of management. There is no approval required from the government for its use, as happens when a corporation seeks to raise funds via selling of stocks, bonds and securities. In addition, bonds and stocks have costs related to them, for instance, interest that is paid on bonds whereas profit retention avoids such costs (Tirole, 2010).
Private equity-This is a source that is popular with small firms or start-ups that cannot raise funds through the stock exchange or rather do not desire to subject themselves to other financing options available. Thus they prefer raising capital via private equity, a process that basically comprises of private investors offering capital to a corporation in exchange for a given stake in the firm. A private equity company is a consortium of investors that pool their capital together for purposes of investment, mostly in other companies (Scanlan 1997).
Equity securities-commonly referred to as stock is the fourth source of capital for corporations. Equity is basically an ownership stake in a business or property. Stock being the smallest form of new capital is of great importance to a firm in beginning a company and its early operations. A stock will offer an investor several legal rights such as ownership, sharing in earnings, transferability as well as the power to vote. Stocks are acquired through payment of cash (Jenkins 2013).
2. A financial market basically entails a market where entities and people ...Download file to see next pagesRead More
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