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Corparate finance - Essay Example

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Hoad Limited is floated in a region where the stock exchange is under-developed, and its internal resources are not adequate to finance the projected…
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Download file to see previous pages In the case of Hoad limited the capital investment is the resources needed to acquire new and replace old production equipment. Organizations should come up with efficient capital investment plans for how the budget should be allocated and how the financing will be acquired.
An organization can obtain funds through two approaches namely equity and debt. Equity investments refer to a situation where the company offers ownership to investors or uses retained earnings to finance projects (Dow, 2009: p.91). In the case of Hoad limited, the retained earnings and issuing of more stock won’t be adequate to fund their intended capital expenditure. The other option that is viable to Hoad limited is the use of debts. Debt financing involves acquiring investors who receive a promise of future payments without acquiring ownership of the organization (Dow, 2009: p.91).
Deciding on the best funding approach is relevant for Hoad Limited given that investment is a crucial component for organizations. Though markets may be the preferred mode of financing in developed countries for organizations, establishing an alternative finance option is critical in regions with underdeveloped stock exchange (Allen, Carletti, Qian, & Valenzuela, 2012: 4). In regions with under-developed stock exchange, a well-established system is crucial in exploiting the gains from trade. These opportunities ought to be matched with relevant funding based on the standard and non-standard sources and also domestic and international sectors.
Before Hoad limited decides on the best approach to adopt in acquiring debts to finance the capital expenditure, the organization has to evaluate its capital structure and determine the best way forward. The business has to decide whether to use more equity or more debt in its capital structure (Dow, 2009: p.95). The company can increase its expected returns when the return from a capital investment is greater than the cost of ...Download file to see next pagesRead More
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