Equityis often considered as a stock issue. However, the use of retainedearnings is also a form of equity financing. Retained earnings arefunds a company holds to fund projects rather than payment as adividend (Dow, 2009). When a corporation uses retained earnings toequity, the company is using shareholder funds (Dow, 2009). Usingretained earnings may increase shareholder value while notnecessarily increasing share issuance or undertaking new or moredebt.
Usingretained earnings also has an added benefit of reducing somecorporate taxes (Caves & Peterson, 1986). Caves and Peterson(1986) states stock issuance incurs a cost to the corporation anddividend payments Bears added tax to shareholders. Shareholdersreceiving dividend payments are subject to a capital gains tax. Usingretained earnings is the preferred method of new investment with newstock issuance as a less attractive option (Jianzhou & Ye, 2013)as new shares will lower shareholder value by dilution (Rappaprt &Sirower, 1999). Debt financing is preferable to new stock issuance asit is less expensive then issuing new shares.
Theuse of retained earnings has the additional benefit of not increasinga companyâ€™s leverage or the debt to equity ratio (Elsas,Flannery, & Garfinkel, 2014). A successful acquisition will oftenincrease shareholder value. The proposed strategy involving the useof retained earnings is effective as it does not necessarily increasecorporate debt, increases shareholder value by not diluting existingshares, maintains ownership ratios by keeping the number of sharesthe same, and potentially reducing tax liabilities.
Theuse of the loan stock is also a way that company gets its funds. Theloan stock is a long-term debt the company pays with interest that ispaid half yearly and at a fixed rate. It has real value, and interestis to be paid at a stated coupon yield on this amount (Warda,M. (2009).These helps the company as it can enjoy all the benefits associatedwith holding those shares also including the receipts of thedividends generated by the shares. The company applies for this whenin need of funds and they do not wish to pledge for the real estateholdings.
Leasingis another method that the company uses to get funds. Leasing is aform of rental. They usually involve assets like plant and machineryand commercial vehicles that the company leases to other people whoin return gives payment to the services provided. It helps thecompany to attain assets without outlaying cold cash or fund (Chen,A.,2009).Leasing also helps the company to gain the benefit of assetappreciation as the lessee is responsible for the maintenance of theproperty leased to them. For example when the company rents a car,and it gets an accident the person in charge for repair is the lessee
Banklending is borrowing funds from the bank to finance the company. Itmay be short term or medium term loan. The short-term loan is theoverdrafts and the short-term credit that are payable for up to threeyears(Rothman, I.,2012). . The medium term loans are loans payable for the period of three toten years. The loans are good for the company as it ensures that thebusiness gets what they want with selling its assets to get thatmoney.
Chen,A. (2009). Researchin finance.Bingley, U.K.: Emerald.
Rothman,I. (2012). Out-executingthe competition.Hoboken, New Jersey: John Wiley & Sons.
Warda,M. (2009). Forma limited liability company in Florida.Naperville, Ill.: Sphinx Pub.