Also, the importance of the capital asset pricing model for firms which want to evaluate their cost of capital, is explored in the next part. The link between CAPM, the required return on equity and the weighted average cost of capital is explored, with the help of various resources.
There are many ways for the companies to raise the capital, the most common way is from stock markets, in this way the investor will be part from this company and the benefits will be based on the company performance and the company success is important for the shareholder. Another option is from bonds markets, in this way the bond owner does not have the ownership in the company and the benefit not very important for the bondholders, also the bondholder does not care about company success (Young, A 2009). For example if a firm undertake debt to finance the business, it will help the owner to retain the ownership but it will result in regular payment of interest and the lenders are less interested in success of the company, so if the owner relay more on debt fund, it will enhance financial risk. On the other hand if capital is raised through equity, then large volume of fund can be raise for longer time period and the investors will be more interested in growth and success of the company but there will be loss of ownership as the equity share holders have the voting right to participate in decision making process. Bonds investment tools provide flexible funding and appropriate for companies, and at this time business companies need many way for funding, because the business sector now is changeable (Fadak, T 2004). Buy and sell debt was one of the main reasons for the occurrence of the global financial crisis, because that we have to be careful (Almarshad, M 2009). In my opinion In this argument I agree with the first writer, because at this time the business sector has many challenges and we must provide appropriate solutions for problem especially the problem of funding.
A. Raising capital from bond and equity markets
1. The initial public offering
When a company is in need of capital, there are two options which will comprise the mix of its capital structure: one is debt, and the other is equity. If the company chooses to raise capital from equity financing, there are also various options. One of these options include raising capital from financial markets such as the stocks market either through seasoned offering or a new issue, most commonly known as the initial public offering (Lee, I et al. 1996). The initial public offering takes place when a company decides to issue stocks that is available for the public's investors (Strategies for raising equity capital, 2003). The company employs underwriters-investment banks that first buy the securities from the issuing corporation and re-selling it to the investors-at-large (Szewczyk, H. S. et al. 1991). Underwriters usually help the issuing company to prepare the prospectus, which is a document that describes the company as well as its prospects. A lot of practitioners as well as academicians regard IPOs as one of the most costly ways to raise equity capital. IPOs are required, by law to be registered in the Securities and Exchange Commissions (Gay, K 1999). The issuing company pays for administrative and legal fees, which are part of the IPO registration (Lee, H. W. et al. n.d).
2. Seasoned equity