Sources of finance For Expansion Essay Example | Topics and Well Written Essays - 750 words

Sources of finance For Expansion - Essay Example The most intriguing phenomena associated with IPOs are the poor performance in the long run. Generally the period of evaluation is from one to three years. Take any of the threshold IPOs that are sure to under perform. Researches have shown that this underperformance will last up to three to five years. Ritter and welsh (1992) clearly shown that there is 23.4 % for a three year buy and hold strategy. There are many explanations presented why IPO under perform when compared to any threshold. After beginning of the company its shares are sold to the public to accumulate the initial capital for the company. To purchase the necessary equipment and raw material the company needs this amount. Without the initial capital no company can begin their basic operations. The reason behind selling shares to the general public is, as the public constitute a large population who can generate huge amount of capital and they also constitute a large context of population who are also the consumers for the products being manufactured and sold by this company. The reason behind general public buying the shares of the companies are that the returns gives by the company on the shares purchased is proportional to the profit of the company. If the company is making huge profits then a part of the profit is divided and equally distributed to the shareholders with respect to there purchased quantity. Limited equi Rajinder Deane October 13, 2006 Page 3 Limited equity financing is used by most of the small or growth stage businesses. Whereas in debt financing, funds pour in from different quarters like from friends, relatives, etc. Venture capitalists are the most common source of equity funding. Venture capitalists may be institutional risk takers, financial institutions, wealthy persons, etc. and most of them specialize in industries. Commercial finance companies, financial institutions, banks, savings and loans, Lloyds Bank small business, etc. are some of the sources for debt financing. Because of their positive impact on the whole economy local and state government encourage the growth of the small companies. In debt financing additional funds comes from friends, family, relatives, and industry colleagues, etc when capital investment is smaller. When the equity to debt ratio of the firm is high then debt financing should be taken. If the proportion of the debt to equity ratio of the firm is high then it is advised that the owners should increase their equity investment, that way they cannot jeopardize firm's survival. Sincerely, Jack Stroth References 4hb.com. What is the Business Letter Format Retrieved October 12 2006, .