This lesson provides a comprehensive overview of the various financing options available to corporations. It examines the characteristics, advantages, and disadvantages of debt, equity, and hybrid instruments, as covered in global corporate finance curricula.

• Equity Financing: Equity capital represents ownership stakes in the company. It is raised by issuing shares to investors in exchange for cash. Companies can obtain equity funding through public markets (Initial Public Offerings, secondary offerings) or private markets (venture capital, private equity).

  • Advantages: No fixed repayment obligations; dividends are discretionary; strengthens the balance sheet.

  • Disadvantages: Dilutes ownership and control; shareholders expect a return; higher cost than debt due to residual risk.

  • Forms: Common stock, preferred stock, retained earnings.

• Debt Financing: Debt capital involves borrowing funds that must be repaid with interest. It can be obtained privately through bank loans or publicly through issuing debt securities (bonds, debentures, commercial paper).

  • Advantages: Interest is tax-deductible; no dilution of ownership; fixed repayment schedule provides certainty.

  • Disadvantages: Obligation to make regular interest and principal payments; increases financial risk; may impose restrictive covenants.

  • Forms: Bank loans, corporate bonds, debentures, leases, mortgages.

• Hybrid Instruments: Hybrid securities combine features of both debt and equity, offering flexibility in financing.

  • Convertible Bonds: Debt instruments that can be converted into a predetermined number of equity shares.

  • Preference Shares: Equity instruments that pay a fixed dividend and have priority over common stock in liquidation but typically lack voting rights.

  • Warrants: Options issued with bonds that give the holder the right to purchase equity at a specified price.

• Retained Earnings: An internal source of finance representing accumulated profits not distributed as dividends. It is often the cheapest and most flexible source of funding.