Long term financing strategies and methods

Raising Long-Term Financing

What should managers consider when making the decision whether to finance internally or externally?

Managers need to carefully weight both options when considering whether to choose internal or external financing. This includes an analysis of internal funds available to support their own initiatives which can be identified by subtracting cash dividend payments from available operational cash flow, in other words net income plus depreciation and other noncash charges (Megginson & Smart, 2009). Once the manager is able to establish what is available for internal financing then they can subtract this from the total overall need and see if it makes sense to seek outside funding. This simply gives the manager the bottom line for how much money is needed, however, to truly make the decision if external financing is appropriate, one must include an analysis of the total cost of external financing. This includes transaction costs and fees as well as any legal fees that may be incurred. External financing is subjected to interest charges which will increase the total amount borrowed. Given the added costs of external financing it is no wonder that the majority of companies choose to internally fund their capital needs.

2. What services does an investment banker offer to corporations that choose to raise funds in the capital market?

Investment bankers offer the resource of selling debt and equity securities for the company. These investment banks help managers determine the terms of the security sale and will then underwrite theses terms (Megginson & Smart, 2009. This advice giving include information regarding which form of public offering makes the most sense given the individual characteristics of the company seeking to offer securities. The investment bank receives compensation through an underwriting spread.

3. What legal rules govern the issue of securities to the public in the United States?

The issuing of securities to the public in the U.S. is regulated by both state and federal regulations. Both the Securities Act of 1933 and the Securities and Exchange Commission Act of 1934 are federal laws that govern security issuing. The Security Act of 1933 requires that companies fully disclose information regarding their company as well as the security being issued to all potential investors (Megginson & Smart, 2009). The Security Act of 1993 called for the creation of the U.S. Securities and Exchange Commission (SEC) as well as defining what procedures are necessary for the public sale of securities and for the oversight of public companies. This includes the requirement of companies to file a disclosure form, which is referred to as a registration statement, with the SEC prior to beginning to solicit potential investors. Further, this form must be distributed to all potential investors. The SEC must approve the final registration statement before companies can execute sales to the public.