There are many cases that have been observed where the shareholders’ capital was not adequate enough to support the company’s working capital requirement which matter a lot to the companies’ growth and survival. Majority of time it has been observed and analysed that the companies considering to meet its working capital through the external sources are aware of every aspect of the different financial sources. It is important for the companies to take certain parameter (interest rate, term of usage, impact on company’s financial leverage, conditions of lending agreement, time to get the lending approval and the impact of proposed source on the company’s financial ratios) into consideration while making the financing decisions. The theory of Capital Structure is extensively be used to get insight that how much risky is the company’s approach in using external sources (prominently debt). The Trade-off theory intended that companies must have to balance the costs and the benefits of debts flow within the enterprises. Different sources of capital can be classified in various manners but for the convenience, the all of these sources are classified in to following categories (Security Financing, Internal Financing, Loan Financing, Lease Financing and Other sources). Shanghai General Motors Corporation (SGMC) is regarded as the largest international joint venture undertook in China. This venture was made for the accomplishment of long-term goals established by the both firms’ executive. The capital contributed by General Motors (GM)-China of $350 Million to the SGMC. $350 Million equivalent was contributed by SAIC to the SGMC. For meeting the working capital needs, SGMC required $821 Million Of which about the equivalent of $460 Million contributed through Chinese Banks and the Equivalent of of $361 Million was contributed through the International Banks. It has been understood that Different sources of capital have their positive and weak aspects to the associated companies. Therefore the company should use more than source of capital which thus would be resulted in forming company’s efficient portfolio of financing. In this manner by capitalising on different sources of capital, the company would be able to leverage its risk level. And if the associated company is risk averse then it should go for Security Financing or Loan Financing.
Table of Contents
- Chapter 1: Aims & Objectives
- 1.1. Background Context
- 1.2. Problem Statement
- 1.3. Aims & Objectives
- 1.4. Summary
- Chapter 2: Literature Review
- 2.1. Capital Structure
- 2.2. Agency Theory
- 2.3. Trade-off Theory
- 2.4. Sources of Capital
- 2.4.1. Security Financing
- 2.4.1.1. Ordinary Shares
- 2.4.1.2. Preference Shares
- 2.4.2. Internal Financing
- 2.4.2.1. Retained Profit
- 2.4.3. Loan Financing
- 2.4.3.1. Bank Loans
- 2.4.3.2. Debentures
- 2.4.4. Lease Financing
- 2.4.4.1. Operating Lease
- 2.4.4.2. Finance Lease
- 2.4.5. Other Sources of Capital
- 2.4.5.1. Trade Credit
- 2.4.5.2. Venture Capital
- 2.4.5.3. Overdraft
- 2.5. Summary
- Chapter 3: Case Study
- 1.1. Sources of Capital: A Case Study of Shanghai General Motors Corporation (NAM, 2010)
- 1.1.1. Capital Sources Capitalized for Shanghai General Motors Corporation (SGMC)
- 1.1.1.1. General Motors
- 1.1.1.2. Shanghai Automotive Industrial Corporation (SAIC)
- 1.1.1.3. Working Capital Needs
- 1.1.1.4. Findings
- 1.2. Summary
- Chapter 4: Discussion & Conclusion
- 4.1. Discussion
- 4.2. Conclusion
- 4.3. Recommendation
- Chapter 5: References
Objectives and Key Themes
This report aims to analyze the costs and benefits of different sources of capital for a company's working capital requirements. It investigates how companies make financing decisions, considering factors like interest rates, loan terms, and the impact on financial leverage. The report also examines relevant theories of capital structure, such as the trade-off theory and the pecking order theory.
- Cost-benefit analysis of various capital sources
- The impact of financing decisions on company growth and survival
- Application of capital structure theories to real-world scenarios
- Examination of internal versus external financing options
- Case study analysis of Shanghai General Motors Corporation's financing strategy
Chapter Summaries
Chapter 1: Aims & Objectives: This chapter sets the stage by introducing the context of companies needing to secure financing beyond shareholder capital to meet working capital needs. It highlights the potential costs and benefits of external financing, emphasizing the importance of informed decision-making in choosing capital sources. The chapter lays out the aims and objectives of the report, focusing on analyzing the costs and benefits of different financing methods, considering factors like interest rates, loan terms, and the effect on the company's financial position. It also introduces the concept of financing decisions and their role in maximizing shareholder wealth.
Chapter 2: Literature Review: This chapter delves into the theoretical framework underpinning the study of capital structure and financing decisions. It explores key theories like the agency theory and the trade-off theory, which provide insights into how companies balance the costs and benefits of debt financing. The chapter also systematically reviews various sources of capital, including security financing (ordinary and preference shares), internal financing (retained profit), loan financing (bank loans and debentures), lease financing (operating and finance leases), and other sources like trade credit, venture capital, and overdrafts. Each source is examined in terms of its characteristics and implications for company finances.
Chapter 3: Case Study: This chapter presents a case study of Shanghai General Motors Corporation (SGMC), a major international joint venture in China. It details the capital structure of SGMC, highlighting the contributions from General Motors, Shanghai Automotive Industrial Corporation (SAIC), and various banking institutions to meet its working capital needs. The case study analyzes how SGMC leveraged different capital sources to fund its operations and discusses the findings related to the use of diverse financing strategies. This analysis serves as a practical illustration of the theoretical concepts discussed in the previous chapter.
Keywords
Capital structure, financing decisions, working capital, cost of capital, benefits of capital, security financing, internal financing, loan financing, lease financing, trade credit, venture capital, overdraft, agency theory, trade-off theory, Shanghai General Motors Corporation, case study, financial leverage, risk management.
Frequently Asked Questions: A Comprehensive Language Preview
What is this document about?
This document is a comprehensive preview of a report analyzing the costs and benefits of different sources of capital for a company's working capital requirements. It examines how companies make financing decisions, considering factors like interest rates, loan terms, and the impact on financial leverage. The report also explores relevant capital structure theories and includes a case study of Shanghai General Motors Corporation.
What topics are covered in the report?
The report covers a range of topics related to capital structure and financing decisions, including: cost-benefit analysis of various capital sources; the impact of financing decisions on company growth and survival; application of capital structure theories (such as agency theory and trade-off theory) to real-world scenarios; examination of internal versus external financing options; and a case study analysis of Shanghai General Motors Corporation's financing strategy.
What are the key chapters and their contents?
The report is structured into five chapters: Chapter 1 (Aims & Objectives) sets the context and outlines the report's goals. Chapter 2 (Literature Review) explores relevant theories and various sources of capital (security financing, internal financing, loan financing, lease financing, and others). Chapter 3 (Case Study) analyzes the financing strategy of Shanghai General Motors Corporation. Chapter 4 (Discussion & Conclusion) summarizes findings, draws conclusions, and provides recommendations. Chapter 5 (References) lists the cited sources.
What specific sources of capital are discussed?
The report examines a wide array of capital sources, including: ordinary shares, preference shares, retained profit, bank loans, debentures, operating leases, finance leases, trade credit, venture capital, and overdrafts.
What theories are used to analyze capital structure?
The report utilizes key theories of capital structure, such as agency theory and trade-off theory, to understand how companies make financing decisions and balance the costs and benefits of different funding options.
What is the case study about?
The case study focuses on Shanghai General Motors Corporation (SGMC), analyzing its capital structure and how it leverages different capital sources (contributions from General Motors, Shanghai Automotive Industrial Corporation, and banking institutions) to meet its working capital needs.
What are the key takeaways or conclusions of the report?
The report's conclusions will likely offer insights into optimal financing strategies for companies, considering the costs and benefits of various capital sources, the impact on financial leverage and risk, and the application of relevant theoretical frameworks. The case study of SGMC will provide a real-world example to illustrate these conclusions.
What are the keywords associated with this report?
Keywords include: Capital structure, financing decisions, working capital, cost of capital, benefits of capital, security financing, internal financing, loan financing, lease financing, trade credit, venture capital, overdraft, agency theory, trade-off theory, Shanghai General Motors Corporation, case study, financial leverage, risk management.
- Quote paper
- Junaid Javaid (Author), 2013, Costs & Benefits of each Source of Capital, Munich, GRIN Verlag, https://www.grin.com/document/281115
