Sources of Capital: Internal retained earnings External - Debt (short-term vs.

. long-term), Equity and Hybrids (preferred stock, convertible bonds, etc.) 2. Which source of capital (internal or external) is used more? Why? External if the company can leverage well. This will work out well if the current interest rate on external debt is less than the current dividend pay out percentage and if there is continued opportunity available to the company to make more money with this external debt Internal if the company can convince the shareholders to retain the earnings instead of distributing as dividends and if there is plenty of opportunity available for using such internal funds for profitable deployment. Virtually these retained earnings would be available to the company at nil cost. 3. Which source of external capital (debt or equity) is used more? Why? Almost all the companies use both the forms of external capital debt and equity. The equity is available at nil cost. If the company can leverage well, it can raise debt capital as well and if such debt carries lower interest rate when compared with the percentage earnings. 4. Are there any trends in corporate financing? Capital structure in practice debt capital and equity capital is an evolving subject. Many of the successful companies have one form of financing pattern either wholly using internal funds, or external equity. In case debt capital is sought for, the creditors would insist on adequate margin from the company itself by way of shareholder funds. Thus, depending upon the evolving situation, the modern companies meet their financing requirements either through retained earnings, or equity capital and if debt capital is sought for, with required equity capital arrangements. 5. If a firm issues new debt, what will happen to the firms stock price? And if a firm issues new equity, what will happen to the firms stock price?

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