Dr. Zulfiqar Hasan

Corporation can raise capital by either following Debt Financing, or Equity Financing.  

Debt Financing:

Debt Financing means borrowing money that is to be repaid over a period of time, usually with interest. Debt financing can be either short-term (full repayment due in less than one year) or long-term (repayment due over more than one year.

A type of Financing through the selling of a debt instrument is called Debt Financing.

Equity Financing:

Equity Financing describes an exchange of money for a share of business ownership. This form of financing allows you to obtain funds without incurring debt; in other words, without having to repay a specific amount of money at any particular time.

The major disadvantage to equity financing is the dilution of your ownership interests and the possible loss of control that may accompany a sharing of ownership with additional investors.

Raising money for company activities by selling common or preferred stock to individual or institutional investors.

Reasons for Issuing Shares

  1. To Raise Capital
  2. To Keep Profits and earnings to the owners of the company
  3. To extend the market share
  4. To create the good will
  5. To avoid the borrowings
  6. To avoid the repayments
  7. To make familiar about the company and the products/services
  8. To get the tax benefits

Flotation Costs

The costs incurred by a publicly traded company when it issues new securities. Flotation costs are paid by the company that issues the new securities.

Underwriting fees
Legal fees and
Registration fees.


A subject that comes up quite a bit in discussions involving the selling of securities is dilution. Dilution refers to a loss in existing shareholders’ value. There are several kinds:

  1. Dilution of percentage of ownership.
  2. Dilution of market value.
  3. Dilution of book value and earnings per share.