i) Ways of financing a company Companies are financed using either share capital or loan capital Shares are measured in terms of interest. A shareholder is not a creditor of the company for the money he has invested in the company Shares are of no-par value. (Section 43 of Act 992), meaning the shares have no particular amounts or value attached to it in the Constitutions of the company. A company may raise a loan capital and, or long-term funds by the issue of a debenture or of a series of debentures or of debenture stock in order to finance the business without increasing its share capital. A company shall, within two months after the allotment of any of its debentures, or after the registration of the transfer of any debentures, deliver to the registered holder of the debentures, the debentures or a certificate of the debenture stock under the common seal of the company or as certified by two directors and the Company Secretary of that company. Debentures may be secured by a charge over the company’s property or may be unsecured by any charge. With recent Public-Private-Partnership arrangements, government is encouraging private sector investments and sometimes subsidies or tax reliefs are granted. Section 60 of the Central Securities Depository Act, 2007 (Act 733) provides as follows: a) Debentures, shares bonds or notes issued or proposed to be issued by a corporate body and any right, warrant or option in respect of them b) Bonds, treasury bills or other loan instrument of the Government of Ghana or any country c) Rights or interest, whether described as units or otherwise under a collective investment scheme. d) Other rights or instruments as the Minister responsible for Finance may, by notice in the Gazette, prescribe. (6 marks)

ii) Advantages and Disadvantages of financing methods

Financing Method Advantages Disadvantages Shares Flexibility over the use of its finance. The use of shares makes the company determine the type of shares to float. Shareholders ordinarily want the company to continue into the foreseeable future and will reluctantly be driven to press for bankruptcy. Makes the company appealing and saves it from the payment of initial investment or interest. Reduces the likelihood of the company becoming bankrupt. Issuing shares calls for the disclosure of critical financial and non-financial information to the public. Initial stages of offering shares involve elaborate proceedings which can shift the focus of the company. Management of the company determines dividend payout to shareholders. Need to constantly update shareholders on the activities and performance of the company. Management can hide behind any negative events and decisions not to declare dividends. Debentures Encourages long-term funding of the company. It’s cost-effective compared to other funding options. Holders can secure their investment by securing a charge. Control of shareholders and profit share ratios are maintained. Can reduce growth as there is no flexibility in the payment of interests. Reduces management’s control and use over assets used as charges. Bank Loans Opportunity to negotiate for a repayment holiday. Company knows the rate of interest as it is fixed for the term of the loan. Loans do not affect the shares in the company. Difficult requirements that companies need to satisfy. Strict repayment schedules. Payment of penalties by defaulting companies. Huge processing fees. Loans are not repayable on demand. Bonds Helps retain more cash in the company. Does not dilute the value and holdings of existing shareholders. Offers are means of stabilizing the finances of the company at a fixed interest rate. Flexible way of raising debt capital. Constant payment of interests even if the company makes a loss. Potential reduction in the company’s share value if net profit declines. Liking imposition of strict and unfavorable convents by investors Rigid compliance with listing rules and regulations. (4 marks)