principles of finance 1 W7 discussion

Principle of Finance 1 Week 7

Name

Institution

Tutor

Course

Date

Prompt #1: ll. Holders of equity capital (common and preferred stock) are owners of the firm. There are those that argue that having equity capital benefits the organization versus debt. With the variety of debt structures available, such as angel investors, fund-raising, e.t.c. Do you believe that it is better for the organization to give up part of the ownership in the company or to seek straight debt outside the company?

Recently, companies have two options when they want to finance their business for growth. They can either use equity or debt. Debt is usually a loan that is given to an individual or company, where there is a set date for paying that loan with interest. Equity on the contrary, is when an investor is given some shares in the company for them to give money to the company.

I believe that it is better for the organization to give up part of their ownership in the company which is the use of equity. Equity as shared by D Hillier, M Grinblatt and S Titman (2011) capital usually one of the best since it reduces the risks of cash flow which is usually accompanied by the payment of interests on the loan or debt. It allows the business to use resources gained and reinvest in the company for growth whereas in debt, it does not give room for resources to be invested in the business because the investors are usually on a regular payroll.

According to T Adrian and HS Shin (2014), companies that have limited cash flow or intend to have usually use equity as their source of financing. Most investors are usually patient when they invest as equity, thus gives room for the company to acquire more money. The growth and success of the company is usually directly proportional to the growth in investment. When a company grows, the investment also grows as well.

When investors use equity to finance the company, the amount of equity they invest is used to equate to the number of shares they would own in a company. The amount of shares an investor has in the company also helps them determine the position they hold in a company. Most investors are usually given the position to be the company board members. This involvement of the investor in the company is very essential since they will be involved in the decision making of the company’s future. This is because, the investors are always interested in getting the money they invested with an additional interest in the company. Equity is better for an organization since the shares given to the investors can always be used as a leverage when the debt becomes overdue (T Adrian, HS Shin (2014).

Despite its many advantages, all investment debt structures are not to perfection. Even when a company decides to combine the debt structures, they only reduce the chances of failure of the debt structure but doesn’t still qualify to be perfect. It is also very essential for a company to agree on the terms and conditions of payment with the investors before agreeing on to get involved.

Prompt #2: Technology has advanced how organizations raise money or seek debt to finance their operations. Today social media and the Internet have influenced these processes. For this discussion, provide an example of a venture capital strategy that you would use to start your own business. Discuss how this strategy is different than traditional debt structures.

A venture capital strategy is a type of an investment that deals with equity where its strategy involves giving support to the business when it is just an idea all the way to when it has developed into a business(OECD, 2014). It usually involves equity that is obtained professionally or formally, where companies get funds from people who are wealthy, companies that are involved in insurance or pension. The venture capital usually has a limit of at least 10years and after that the partnership that is involved between a company and investor is usually dissolved.

The venture capital strategy usually provides a company with support from technical to the Managerial for supporting the well being of that company. The investments that should be made in the company are usually identified by the exit possibility. I would use the venture capital strategy that involves funding the company when it is just an idea to the start up and stages of financing. This is because, according to Ernst and Young (2014), the venture capitals gives more priority to the early stages of investment. They would want to make sure that the company has enough money that would support the company after the partnership is dissolved.

Venture capital has also been known to be the leading in using technology. It has analyzed and determined the future progresses of a company and the potential threats that might be a threat to the up coming business and also providing solutions or alternative ways to deal with those threats(Landstrom and Mason, 2012). Thus the Information Communication Technology has been the pillar to the successes of the venture capital.

Venture capital strategy is considered the best because it gives focus on small and large companies with potential in growth and the fact that its investors always ready to invest and a strategic buyer ready to spend on the investment. The knowledge, easily accessed market and the involvement of technology are usually the factors that encourage innovative entrepreneurs to use the venture capital.

Reference

Ernst and Young (2014), Adapting and evolving. Global venture capital insights and trends 2014.

Landstrom H and Mason C (2012), Handbook of Research on Venture Capital, Volume 2.

OECD (2014), Entreprenuership at a glance 2014, OECD Publishing.

D Hillier, M Grinblatt and S Titman (2011), Financial markets and corporate strategy

T Adrian, HS Shin (2014) Financial intermediary balance sheet management, A Flow-of-Funds Perspective on the Financial Crisis, 2014