AC313 : Project No.

Corporate Finance

Sources of Finance

Compiled By: Margaret Aeka Course: Bachelor In Accountancy Year: (3) Online

Student ID: 22700021

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Table of Contents
Introduction……………………………………………………….……………………….….2
Sources of Finance: Debt Finance…………………………….……………….…….2
Types of Debt Finance…………………………………………………………………….3-4
Advantages & Disadvantages of Debt Finance………………………………..4-5
Example of Debt Finance…………………………………………………………………5
Sources of Finance: Equity Finance………………………………………………….5
Types of Equity Finance……………………………………………………………………5
Advantages & Disadvantages of Equity Finance………………….…………….6-7
Example of Equity Finance…………………………………………………..……………7
Case Study…………………………………….……………………………………….………….8-9
Conclusion and
Recommendations…………….……………………………………………………….……..10
References…………………………………………………………………………………………10

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I. Introduction
Source of Finance refers to the process of acquiring additional funds or capital to support various
business activities such as expansion, investment, and operational requirements. In an ever-
changing business landscape, having access to additional funds is essential for businesses to stay
competitive and grow. By securing additional financing, businesses can invest in new technologies,
expand their operations, hire new talent, and improve their products and services.

There are various methods to acquire finance, including loans, investments, and other financial
instruments. Some common sources of finance include taking loans from banks or financial
institutions, issuing bonds or stocks, seeking investments from venture capitalists or angel
investors, using personal savings, or even crowdfunding.

The choice of the source of finance depends on the financial situation of the individual or
organization. In this report the (2) two sources of finance that will be discussed are equity finance
and debt finance. Equity finance involves raising capital by selling shares of the company,
providing ownership to the shareholders. Debt finance, on the other hand, involves borrowing
money from banks or other financial institutions, which needs to be repaid with interest over time.

Both equity and debt finance have their own advantages and disadvantages.

II. Body
A. Debt financing

Debt financing is a financial strategy that enables companies to raise funds by borrowing money
from banks or other financial institutions. This strategy involves taking on debt in order to finance
operations or investments. The borrowed funds must be repaid over a set period, typically with
interest.

Types of debt financing

There are different types of debt financing, including loans, bonds, and credit lines. Loans are a
common type of debt financing that involves borrowing a specific amount of money and repaying
it over a set period of time, typically with interest. This type of financing is often used for short-
term projects or to cover operating expenses. For instance, getting loan to buy a house, that will
be rented out to re generate income.

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Bonds, on the other hand, are issued for longer periods of time and can fluctuate in value based
on market conditions. They are essentially loans that are sold to investors, who receive interest
payments until the bond matures and the principal is repaid.

Credit lines are a type of revolving debt that allows companies to borrow money as needed, up to
a certain limit. This type of financing is often used for ongoing expenses or for situations where
cash flow needs fluctuate over time.

Overall, debt financing can be a useful tool for companies looking to raise funds, but it's important
to carefully consider the terms and risks associated with different types of debt financing before
making a decision.

B. Advantages and disadvantages

Advantages

Debt financing is a common practice for businesses to raise capital, and it offers both advantages
and disadvantages.

1) One of the most significant advantages of debt financing is that the interest payments made
by the borrower are generally tax-deductible. This tax-saving feature can be highly
beneficial for companies as it can reduce their overall tax liabilities, which can result in
substantial savings.

Moreover, interest rates for debt financing are typically lower than those for other financing
options, such as equity financing. This lower cost of borrowing can make debt financing
an attractive option for companies that are looking to raise capital.

2) Another advantage of debt financing is that it allows companies to retain ownership and
control of the business. Unlike equity financing, where investors take a share of ownership
in the company, debt financing does not dilute the ownership of existing shareholders.
3) Its easily accessible and less costly

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Disadvantage

However, there are also disadvantages to debt financing.

1) One of the most significant drawbacks is the risk of default. If a company fails to repay the
borrowed funds, it can result in severe financial consequences, such as bankruptcy or
foreclosure.
2) High interest rates and fees can also be a disadvantage of debt financing. These costs can
significantly increase the overall cost of borrowing, making it more expensive for
companies to raise capital.
3) Excessive debt can negatively impact a company's credit score, which can make it more
difficult to secure future financing. This, in turn, can limit a company's growth potential
and make it challenging to pursue new opportunities.

Overall, debt financing can be a valuable tool for businesses to raise capital, but it is essential to
weigh the advantages and disadvantages carefully before deciding whether it is the right option for
the company.

Example of debt financing

An example of debt financing would be a company taking out a loan from a bank to finance the
purchase of new equipment, to fund an expansion, or to cover short-term cash flow needs.

B. Equity financing

Equity financing is a financial strategy that allows companies to raise capital by selling ownership
shares to investors. This method of funding is different from debt financing, which involves
borrowing money from lenders that must be paid back with interest. When a company engages in
equity financing, the investors who buy the shares become part-owners of the business. They will
share in the profits and losses of the company, and their returns will depend on the company's
financial performance.

There are different types of equity financing available, including common stock, preferred stock,
and venture capital.
a. Common stock is the most commonly issued type of equity financing, and it represents
ownership in a company. Common stockholders have voting rights and can participate in

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 the company's decision-making process. They are entitled to a portion of the profits through
dividends and may also benefit from capital appreciation if the company's stock price rises.

b. Preferred stock is a type of stock that pays dividends before common stockholders. It is
typically issued to investors who want a higher level of income and lower risk. Preferred
stockholders do not have voting rights, but they are entitled to a fixed dividend payment.
In the event of a company's liquidation, preferred stockholders are paid before common
stockholders.

c. Venture capital is a type of equity financing provided by investors who are looking for high
returns on their investment and who are willing to take on a greater degree of risk. Venture
capital firms typically invest in early-stage companies with high growth potential. In
exchange for their investment, they receive an ownership stake in the company and may
also provide guidance and support to help the company grow. If the company is successful,
the venture capitalists may earn a substantial return on their investment. However, if the
company fails, the investors may lose their entire investment.

A. Advantages and disadvantages.

Advantages

1) Equity financing is a popular way for companies to raise capital without incurring debt.
One significant advantage of equity financing is that it does not require companies to make
regular payments, which can improve cash flow. This is particularly useful for startups and
small businesses that may not have the revenue to support regular debt payments. Equity
financing can provide access to experienced investors who can offer valuable guidance and
support to help the business grow.
2) Equity financing can also provide access to experienced investors who can offer valuable
guidance and support to help the business grow. These investors often have industry
experience and contacts that can help the company succeed.

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 3) Equity financing has the potential for higher returns than other financing options, such as
debt financing. This is because equity investors have an ownership stake in the company
and share in its profits and growth potential.

Disadvantages

There are also disadvantages to equity financing.

1) Companies that issue equity shares must give up a portion of their ownership and profits.
This can result in a dilution of ownership and control, which may be undesirable for some
business owners.
2) Conflicts with investors can also be a disadvantage, as investors may have different goals
and priorities than the company's management team. This can result in disagreements over
the direction of the company and can potentially harm its success.
3) Raising money through equity finance might prove to be expensive in the case where the
company is not already listed on the stock exchange.

Overall, equity financing can be a useful tool for companies looking to raise capital, but it's
important to carefully consider the advantages and disadvantages before making a decision of
which type of equity financing is more suitable for your business. Equity finance, on the other
hand is the most suitable tool as you don’t go into debt, instead portion or one piece of the company
is sold.

B. Example of equity financing

An example of equity financing would be a startup company raising funds from angel investors or
venture capitalists in exchange for ownership shares. These investors are typically willing to take
on a higher level of risk in exchange for the potential for high returns. Basically the risk involved
to obtain high returns is 10:10, there is probability there may be hiccups along the way. For instance
equipment as start up capital is shipped abroad may be delay due to natural cause, like the weather.
It may be customs clearance that will delay as well. These are possible causes that’s likely involved
in the startup progression.

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 III. Case Study

Tuhava Town Managaement Ltd

The case study is a firsthand account. I am employed by Tuhava Town Management Ltd, a recently
established company under the Rhodes Group of companies which is a real estate & tourism
industry as an account Payable Officer. In this role, I am responsible for processing invoices and
making payments to vendors, as well as reconciling accounts and ensuring that all financial records
are accurate and up to date and payments to suppliers are paid within the credit terms period. The
case study is about Tuhava Town Resort a business arm of Tuhava Town Management Ltd

Overview

Tuhava Town Management Limited is a new and exciting business that operates in the real estate
and hospitality industries. Tuhava Town is located just 23 minutes outside of Port Moresby Central
Business District (CBD) in Napa Napa Road, Porebada. The business was established in 2019, the
following year business started its operation. In just a year of operation, the hospitality business
(Tuhava Town Resort) has seen a significant increase in demand for conference hire and
accommodation. Many government departments as well and private organizations and and NGOs
choose Tuhava Town due to its affordability and serene location outside the city.

The resort offers a wide range of amenities that make it an ideal location for conference hire .
These include a private beachfront, pool, gym, supermarket, restaurant, and bar. Guests can enjoy
a refreshing swim in the pool or a workout at the gym. They can also have a tour to explore the
Tuhava beach and the beautiful environment of friendly and welcoming locals and unique sites
that makes the experience more rewarding. For those who prefer a more relaxing time, the private
beachfront offers a peaceful retreat. The supermarket on-site is convenient for guests who need to
purchase essentials during their stay. The restaurant and bar offer a variety of delicious meals and
beverages, making it easy for guests to unwind after a hectic day.

Problem

Over the past few years, Tuhava Town Resort has experienced a significant increase in demand for
their services, particularly in conference rooms and accommodation. However, their current
facilities were not enough to meet this growing demand, leading to a major challenge for the
business in 2021 and 2022.

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Despite their best efforts, the resort has been unable to keep up with the ever-increasing demand
for their services, which has resulted in a loss of potential clients. This, in turn, has led to a loss of
revenue and reputation of keeping major clients. The situation has been particularly challenging
for the resort, as it has been forced to turn away potential clients in the hospitality industry.

Solution

In response to the growing demand for conference facilities, the owners of Tuhava Town decided
to take action. They chose to invest in building a brand-new conference center, which was funded
through debt finance. The construction of the conference center was undertaken with careful
consideration and planning, with the aim of creating a facility that would meet the needs of modern
businesses.

The new conference center now offers state-of-the-art facilities, including the latest audio-visual
equipment, high-speed internet access, and comfortable seating arrangements. The center is also
designed to be highly adaptable, with the ability to cater to a wide range of events, from corporate
conferences to trade shows and exhibitions.

Since the opening of the new conference center, Tuhava Town has become an even more attractive
location for businesses and organizations looking to host conferences. Guests can now enjoy a
wide range of amenities and conveniences, including ample parking, on-site catering facilities, and
easy access to local attractions and amenities.

Overall, the investment in the new conference center has been a resounding success, providing a
boost to the local economy and helping Tuhava Town to cement its position as a premier
destination for conferences and events.

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IV. Conclusion
In conclusion the sources of finance whether it be Equity or debt financing are a very significant
tool in a business. Equity financing differs from debt financing: the first involves selling a portion
of equity in a company, while the latter involves borrowing money. Debt financing is a common
practice for businesses to raise capital, and it offers both advantages and disadvantages, and
discussed as follows, easily accessible and less costly whereas major issue is the high interest rates
involved. The combination of debt and equity financing impacts the company’s cost of capital.
Debt financing is safer for investors, while equity financing is more risky for investors, however
there is an impact in choosing the right source of finance to suit the types of business. For the
companies, the choice of debt or equity financing is based on many factors, such as size of the
company, state and dynamics of the industry, perspectives of the company, debt-to-equity ratio,
debt servicing costs etc. The purpose of this essay is to consider the decision of Tuhava Town
Management Ltd T/As Tuhava Resort who chose a suitable source of finance to meet the demand
of the business in order for business to operate.

Recommendations
In order to perform the choice of business financing (debt versus equity), it is necessary to consider
the perspectives of the company as well as the nature and dynamics of the industry. Equity finance
is stable growing, creates new products and shows good progress compared to its competitors as
stated in case study of Tuhava Resort.

References
Baton, C. (2024, February 25). Investopedia.
UKEssays.Com. (n.d.).

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