corporate-finance-assignment-part-b.docx

The firm could release from the stress of a large fix

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dividends, company could choose to pay zero dividends or a small amount of dividends. The firm could release from the stress of a large fix amount of expenses of the company. The company would be open to the chances of borrowing if they practice equity financing. A company which are majorly financed by equity could keep a controlled financial leverage ratio. Financial leverage ratio measures the ratio of financing by equity and debt. A normal requirement of a company by any bank or financial institutions is roughly 20 to 25% by equity to finance other 75 to 80% debt. Lower levered firms have higher chances of smooth borrowing of debt in times of need. For the purpose of getting more capital, an organization could gain it from the existing capital providers. This could be practice by issuing the right shares with less or no floatation cost. The floatation costs is an expanses that are normally involved in raising fund.
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On the other hand, equity financing give disadvantages too. Equity financing has been considered as the most difficult way for an organization to get funding. It is not only required many statutory compliances, it also requires other expenses, such as fee of merchant banker, brokerage, underwriting charges, and other issue expenses. Equity finance is a funding method with high cost and no tax deducted. It consists high cost is because of the high required rate of return from equity share investors. It is normally for an investor to expect higher rate of return since the equity share investment is with higher risk compare to bonds. Equity financing is not only costly but also without tax shield. The dividends that received by the shareholders are not a tax deductible expense for the organization. Thirty, Equity Financing may have discount equity share price. When an organization decided to offer shares to the public, it is required to have an underwriting of shares. In this case, the organization would normally appoint an underwriter. The underwriter is to assume the risk of
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