Debts finance or equity finance

Since the variety source of finance for corporation to choose, it has been a big problem for them to make decision. The debts finance and equity finance are two major methods of financing. Although they are quite similar in some way, they still have some unique advantage. Some small firm prefer to finance from debts finance, because it can provide the company needs with the low interest cost. In terms of the equity finance, although the company can get large number of capital from the capital market, it lose the control about the company. Moreover, it will cost a lot for them to make the initial public issue from the capital market.

However, most of the company more prefer to financing from the capital market. This is because not only the capital assets will not need to pay back but also the liquidity risk will no be a problem for the company. Especially, it was very suit for the large corporation, which always need to finance a large sum of money. This could be seen by Tullow, who is an international oil and gas company (Tullow.com).

After Tullow has noticed the natural decline production from the main exploration area, Tullow has changed its strategy and mainly focus on its exploration programme. Moreover, based on its new strategy, its new finance strategy is financing from the surplus cash flow or equity. Hence, it could be found that the company issue the shares annually, which leads the gearing ratio decreasing significantly. However, the ratio did not dropped dramatically in 2010 because of the company also bank loan to support the programme of acquisition of 50% stake in Uganda, which could be found from the cash flow. The reason for Tullow did not follow its finance strategy, because of the unexpected event of delayer finalising transaction in Uganda, which increase the needs of financing. Moreover, the reason for Tullow did not finance from the equity again is the amount of share issue in 2010 is larger than the pervious issue and the liquidity ratio is quit health in Tullow. Therefore, Tullow have to choose debt finance.

Overall, from the case of Tullow, it could be found that priority financing method is finance from the equity. The major reason for this is the company did not need to pay back the capital and the company only has to pay the annual dividend as the interest cost, which is a great deal for the large company. On the contrast, the bank loan always be the last choice for the big company like Tullow. This is because of the bank loan will increase the company’s liquidity risk and if there is any unexpected event happened, the company will meet the problem of bankrupted. However, from my personal view, the decision about whether to issue from the equity or debts more depends on the current situation of the company. For the small firm only small sum should go for the debts finance and the large sum which are more than 500,000 pounds than the company could consider joint venture. The equity finance are more suit for the large firm because of the equity finance needs large sum of transaction cost. Moreover, it is vital for the corporation to take the liquidity risk into consideration before they go for the debts finance.

(All the information are based on the website and the annual report of Tullow)