A business faces three major issues when selecting an appropriate source of finance for a new project (Jay 2003):
1. Can the finance be raised from internal resources or will new finance have to be raised outside the business?
2. If finance needs to be raised externally, should it be debt or equity?
3. If external debt or equity is to be used, where should it be raised from and in which form?
There are two main sources of equity finance:
* Internally generated funds
* Share Issues
1. INTERNALLY GENERATED FUNDS
Internally generated funds comprise retained earnings (i.e. undistributed profits attributable to ordinary shareholders) plus non-cash charges against profits (e.g. depreciation).
For an established company, internally generated funds can represent the single most important source of finance for both short and long-term purposes.
Internally generated funds are a cheap and immediate source of finance. However, it is essential that the company's dividend policy is taken into account when determining how much of each year's earnings to be retain (Foulks Lynch 2002).
2. SHARE ISSUES
These are a variety of issuing new shares according to the circumstances of the company and these include:
a) Public Issue: Also known as "offer by Prospectus" or Initial Public Offerings (IPO's). Shares are sold directly to the public, usually with the advice of a Merchant Bank.
b) Offer for Sale: The company sells the shares to an issuing house which then sells the shares to the public (thereby saving the company some work as the issuing house takes responsibility for the paperwork - but for a charge). Most share issues use this approach.
c) Sales by Tender: A way around the pricing problem is to make an offer for Sale by Tender. A minimum reserve price is set and subscribers are invited...