Financial advising report - Free Essay Example

Introduction This report is going to be a reference for the board of directors in making financing decision on newly projects amounts about pound; 200 million. There are three issues that we have to take a deep look before the board makes the financing decision. Firstly, they are the role that played by capital markets and efficient market hypothesis (EMH) and how important of them. Follow by the different sources of finance that available for our company and identify each of the merits and risks. Lastly is how important of cost of capital to the company and how its implications on capital structure. These are the benefits that the company will gain if the board makes the decision based on this report. The proper choices of sources of finance will make a good financing decision. In the meantime, good financing decisions will lead the company to a better and competitive investment opportunities. This report will align the decisions to the overall company strategies. The role and importance of capital markets Capital markets function as both primary and secondary markets for debt and equity securities. The term primary market refers to the original sale of securities by governments and also corporations. The secondary markets are those in which these securities are bought and sold after the original sale. But in this report we only focus on corporate securities only. There are factors that affect securities buying and selling. Timing and liquidity is the main factors that always affect the company issue share. The company must identify when is the right timing to issue share and the liquidity of the share issues. Segmentation also very important as we must target the potential buyer only we can issue the shares. This require to do a deep market research on who are willing to buy our shares. The course of transaction also very important as we must have a clear direction on it. Capital markets very important to the company as here is the place where they can raise funds when they need it. At here we can raise long term funds that suitable to our project which depends on the duration of the project but of course the company reputation must be good. For example, when Maxis want to re-list their company in Malaysia Bursa they gain a very good response from the public. From that we know that Maxis reputation is positive in public mind. Primary Markets In the primary market transaction, the corporation is the seller, and the transaction raises money for the corporation. Corporations engage two types of primary market transactions; they are public offerings and private placements. Public offering, as the name mentions, it involves selling securities to the general public, whereas a private placement is a negotiated sale involving a specific buyer. By law, public offerings of debt and equity must be registered securities exchange commission (SEC). In Malaysia is Securities Commission Malaysia. Registration requires the firm to disclose a great deal of information before selling any securities. The accounting, legal, and selling costs of public offerings can be considerable. Partly to avoid the various regulatory requirements and the expense of public offerings, debt and equity are often sold privately to large financial institutions such as life insurance companies, mutual funds or banks. Such private placements do not have to be registered with the (SEC) and do not require the involvement of the investment banks that specialise in selling securities to public. Secondary Markets Secondary markets transaction involves one owner or creditor selling to another. Therefore, the secondary markets provide the means for transferring ownership of corporate securities. Although a firm is directly involved only in a primary market transaction when it sells securities to raise fund, the secondary markets are still critical to large company such as listed companies as us. The reason is that investors are much more willing to purchase securities in primary market transaction when they know that those securities can be resold later if they want. Efficient Market Hypothesis (EMH) The efficient market hypothesis (EMH) asserts that well organised capital markets, like NYSE, are efficient markets, at least as a practical matter. In other words, an advocate of the EMH might argue that although inefficiencies may exists, they are relatively small and not common. If a market is efficient, then there is a very important implication for market participants. All investments in the market are zero NPV investments, Fama (1998). The reason is not complicated. If prices are neither too low nor too high, then the difference between the market value of an investment and its cost is zero; hence the NPV is zero. As a result, in an efficient market, investors get exactly what they pay for when they buy securities, and firms receive exactly what their stocks and bonds are worth when they sell them. What makes a market efficient is competition among investors. Many individuals spend their entire lives trying to find mispriced stocks. For any given stocks, they study what has happened in the past to the stock price and the stocks dividends. They learn the extent possible, what a companys earnings have been, how much the company owes to creditors, what taxes it pays, what businesses it is in, what new investments are planned, how sensitive it is to changes in the economy and so on. If we know more about some company than other investors in the marketplace, we can profit from that knowledge by investing in the companys stock if we have good news and by selling it if we have bad news. In other words, the shares or bonds issues by our company will be successful if only the market is efficient. Otherwise, there will be a failure for us. Forms of Market Efficiency Strong form efficient If the market is strong form efficient, then all information of every kind is reflected in stock prices. Semi-strong form efficiency This form of efficiency is the most controversial. If a market is semi-strong form efficient, then all public information is reflected in the stock price. Weak form efficiency In this form, it suggests that a minimum current price of a stock reflects the stocks own past time prices. Means we got to study past time stock information. Different sources of finance Internal sources Ordinary Share Ordinary share is the foundation of the financial structure of a company and should be the source of most of its long term finance. Since a company is owned by its ordinary shareholders, raising additional finance by issuing new ordinary shares has ownership and control implications which merit careful consideration. Ordinary shareholders are the ultimate bearers of the risk associated with the business activities of the companies they own. This is because an order of precedence governs the distribution of the proceeds of liquidation in the event of a company going out business. The first claims settled are those of secured creditors, like debenture holders and banks, the one who are entitled to receive in full both unpaid interest and the outstanding capital. Then coming to those unsecured creditors such as suppliers. The next claims are the preference shareholders and lastly only come to the ordinary shareholders.