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Capitalization Essay

Posted by admin as Example papers

Capitalization Essay Example

The expansion of any kind of business activities requires substantial capital resources investment. The process known as capitalization attracts attention of financial top management and executive board. There are two choices of attracting capital (besides, of course bank loans which are given to business for the realization of some specific projects or meeting short term financial targets and obligations) – equity and debt capitalization. In simple terms equity capitalization is an attraction of internal resources of the enterprise being giving an opportunity to the owners of the business to increase their personal stake in the company (shareholders’ equity). On the other hand, the external debt capitalization is just allowing the “third-party” investors to participate in the development of the enterprise and besides securing their funds get return on them, which is higher than the interest on the bank deposits would be.

Of course each of the methods of capitalization has advantages and disadvantages. Generally the company would seek external debt capitalization through the issue of the bonds when the question of addition to company’s management is political. Thought the attraction of additional shareholder’s equity the company limits itself with a long-term obligation with one party. Since at the foundation of the business the shareholder’s have agreed on some distribution of the company profit – further fairness of profit distribution can be achieved only if shareholders increase their wealth proportionally. What if one of the business owners does not have enough resources for increasing his share? The increase of capital through the issue of common or preferred stock could also be a vary touchy subject since issue of stock gives a chance to receive a part of the business and eventually have a direct impact on the management of the company. Sometimes additional stock can cause the take over of the business. In this cases the best possible solution would be bond capitalization – the only obligation of the enterprise is financial side of the matter – payment of coupons and face value at the maturity date (with some nuances depending on the type of the bonds).

I would prefer investing into bonds for the reason of being absolutely sure that the company will pay me coupons and give back the full amount of investment at maturity date. The stock is not that important because it depends on the market situation (the stock exchange goes up and down and the value of my shares changes) plus the decision of the management whether to pay dividends or not. In case of bonds I would be interested in rather junk bonds – because very often they provide a high return on initial investment though very poorly guaranteed as to the return in case something fails. Another type of the bond that would be attractive to me is zero-coupon bond for it requires investment lower than face value and pays off in full at the maturity though does not have any coupon payments.

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