LONG-TERM FINANCING IS for more than five years. The CFO should be familiar with the what, why, and how of equity and long-term debt financing. Equity financing consists of issuing preferred stock and common stock, whereas long-term debt financing consists primarily of issuing bonds. Long-term financing is often used to finance long-lived assets (e.g., plant) or construction projects. A capital-intensive business will have greater reliance on long-term debt and equity. This chapter presents a comparison of public versus private placement of securities and discusses the advantages and disadvantages of issuing long-term debt, preferred stock, and common stock as well as the financing strategy most appropriate under a set of circumstances. The financing policies should be in response to the overall strategic direction of the company.
A company’s mix of long-term funds is referred to as the capital structure. The ideal capital structure maximizes the total value of the company and minimizes the overall cost of capital. The formulation of an appropriate capital structure takes into account the nature of the business and industry, the corporate business plan, the current and historical capital structure, and the planned growth rate.
Should securities be publicly or privately placed?
Equity and debt securities may be issued either publicly or privately. A consideration in determining whether to issue securities to the public or privately is the ...