Acquisition Of Capital

A corporation needs capital in order to start up, operate, and expand its business. The process of acquiring this capital Is known as financing. A corporation uses two basic types of financing: equity financing and debt financing. Equity financing refers to funds that are invested by owners of the corporation.

Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation. Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporatition sells units of ownership, known as shares of stock. Each share entitles the purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased loo shares worth of Ford’s resources, materials, plants, production. and profits.

The person who purchases shares of stock is known as a stockholder or share holder. All corporations regardless of their size, receive their starting capital from

issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because the corporation has rio record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends.

Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take a

severe loss on the initial stock investment. Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds.

One example of debt financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from an investor in return for a bond. The bond has a maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payments to the bondholder during the time the money is borrowed. If these obligations are not meet, the corporation can be forced to sell its assets in order to make payments to the bondholders.

All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.

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