Discussion Questions: Raising Capital and Paying Dividends

Discussion Questions

1. Debt financing would give a company the leverage they need to be successful. This is more often the case when the owners have little or no funds to finance their own business. Something to take into consideration, though, is that borrowing money costs more than just interest. “[It] involves legal, accounting, and investment banking fees, which eat up at least three to five percent of the amount raised” (Coplan). A company would also need enough cash flow to pay down the debt in the future and at that point look to other funding strategies.

An advantage of equity financing would be gaining a partner. The company would acquire a person with a fresh perspective on the business, who could contribute ideas, as well as money. Still, a new partnership would have to be worth the cost of sharing a portion of the company.

2. One reason that companies want to pay cash dividends to their shareholders is that, in some cases, the shareholders have been receiving these dividends for years. They would always expect the same from the company, and change could cause frustration.

A popular argument for choosing not to pay cash dividends is that there are better options available. For instance, some companies would be better off reinvesting their earnings back into the business. “If firms are distributing the bulk of their earnings to stockholders, it means that they aren’t investing in the equipment or undertaking the research that leads to future improvements in productivity, long-term earnings and job creation” (Skinner). When businesses do well, the stockholders are happy.

Works Cited

Coplan, Jill Hamburg. "Raising Capital: Equity vs. Debt - Businessweek."Businessweek - Business News, Stock market & Financial Advice. N.p., 4 Dec. 2009. Web. 17 Oct. 2013. <http://www.businessweek.com/magazine/com/magazine/content/09_72/s0912030511552.htm.

Skinner, Douglas J. "Why U.S. Companies Continue to Pay Dividends - Bloomberg." Bloomberg - Business, Financial & Economic News, Stock Quotes. N.p., 11 Apr. 2012. Web. 17 Oct. 2013. <http://www.bloomberg.com/news/2012-04-11/why-u-s-companies-continue-to-pay-dividends.html.