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
2.1. CAPITAL STRUCTURE
CHAPTER-2: LITERATURE REVIEW
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 SOURCE 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 CAPITALISED 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
Research Objectives and Core Themes
The primary aim of this project is to identify, analyze, and evaluate the various sources of capital available to corporations for meeting working capital requirements, ultimately enabling effective financial decision-making to maximize shareholder wealth.
- Evaluation of internal vs. external financing sources.
- Strategic analysis of capital structure theories (e.g., Pecking Order, Trade-off).
- Case study implementation regarding the Shanghai General Motors Corporation (SGMC).
- Cost-benefit analysis of financing instruments including equity, debt, and leasing.
- Optimization of risk and capital structure leverage.
Excerpt from the Book
2.4.1.1. Ordinary Shares
This is the most widely used financing instrument in almost all industries (Stoltz, 2007). The corporations are looking to raise the capital through the issuance of ordinary shares which not gives the ownership authority in the given but also granted the voting rights which can be exercised in the context of making and setting the company’s strategic objectives and strategic decisions (Alexander, et al., 2007). The advantages and disadvantages of this source are listed below:
Advantages
• The payment of dividends is only made in the condition where the company has the surplus retained earnings. This is a plus sign for the company who are unable to post enough profit during the specified financial period.
• The company is eligible to not to make the repayment of capital collected from as a result of this source until it declare itself as solvent.
• The company can source as much funds as it desire through this source. But the management has to keep track of this financial leverage which may be resulted in giving rise to the agency problem or liquidation situation in engaging firm.
• The accessibility feature of this source intended the company to use this source as a suitable option to meet its working capital requirements or also to keep the shareholders’ wealth on the increasing pattern.
Disadvantages
• In term of cost, this source is not a suitable option because of two factors (Advertisement and Subscription). Although these costs incurred at once only but sometime bearing that much cost would indulged the company in more financial difficulty from which it is really difficult to make recovery.
Chapter Summaries
CHAPTER-1: AIMS & OBJECTIVES: Outlines the significance of working capital for corporate survival and establishes the research goal of evaluating financing decisions.
CHAPTER-2: LITERATURE REVIEW: Examines theoretical frameworks including Capital Structure theory, Agency theory, and Trade-off theory alongside a categorization of various capital sources.
CHAPTER-3: CASE STUDY: Investigates the capital procurement strategies of Shanghai General Motors Corporation, highlighting the use of both equity and extensive debt financing.
CHAPTER-4: DISCUSSION & CONCLUSION: Synthesizes the findings to provide a comparative analysis of financial instruments and offers recommendations for maintaining an efficient portfolio of financing.
CHAPTER-5: REFERENCES: Provides a comprehensive list of academic and professional sources utilized throughout the research project.
Keywords
Working Capital, Capital Structure, Financing Decision, Agency Theory, Trade-off Theory, Security Financing, Internal Financing, Loan Financing, Lease Financing, Venture Capital, Equity, Debt, Risk Management, Financial Leverage, Shanghai General Motors.
Frequently Asked Questions
What is the core focus of this research project?
The project focuses on analyzing the various sources of capital—such as equity, debt, and internal funds—that corporations can utilize to meet their working capital requirements and maintain operational growth.
What are the primary thematic areas covered?
The key themes include the cost and benefits of different financial instruments, the application of capital structure theories, and the practical implementation of these concepts in large-scale joint ventures.
What is the main goal or research question?
The goal is to determine how corporations can wisely select and harmonize different sources of capital to maximize shareholder wealth while balancing financial risk and operational stability.
Which scientific or analytical methods are utilized?
The research employs a literature review of corporate finance theories combined with a descriptive case study method to analyze practical capital procurement strategies.
What topics are discussed in the main body of the work?
The main body details specific financing categories—including security, internal, loan, lease, and other sources—analyzing their respective advantages, disadvantages, and impacts on financial leverage.
Which keywords characterize this publication?
The publication is characterized by terms such as Working Capital, Capital Structure, Financial Leverage, and Equity/Debt financing.
How did Shanghai General Motors (SGMC) finance its working capital needs?
SGMC utilized a mix of registered capital from shareholders (GM and SAIC) and a massive debt financing package provided by a consortium of 39 Chinese and international banks.
Why does the author recommend a diverse financing portfolio?
The author argues that using a variety of capital sources allows a company to leverage its risk level more efficiently and prevents over-reliance on a single, potentially costly, or restrictive financing source.
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- Junaid Javaid (Autor:in), 2013, Costs & Benefits of each Source of Capital, München, GRIN Verlag, https://www.hausarbeiten.de/document/281115
