Nanda Home use 15% of its profit to pay preference dividend. This ratio really attracts very many investors to buy preference of Nanda Home.
Nanda Home just use 50% profit (after paying preference share) to pay for common shareholder, and retain 50% profit to expand business or to buy material or others business purpose. It's necessary to do that because it makes sure Nanda Home will have abundant cash flow to run business. Thus Nanda Home pay for their common shareholders 0. 71385/ common share; value of common share increase 71,385% in comparison with initial value of common share. Through this ratio, shareholder will know the capability of Nanda Home and keep investing in this company.
Otherwise, Nanda Home can retain all their profit to reinvest in new project. However, Nanda Home should provide financial planning as well as business planning to persuade shareholder to wait for their dividends. Moreover, to complete responsibility, Nanda Home has to calculate to take all net profit to pay dividend to their shareholders. Another advantage is, Nanda Home doesn't to pay interest or any loan, but after business, the gross profit has to be divided to shareholders base on their shares and kind of share.
However, it takes time to finish the formalities to become a joint stock company as well as sell share or join in stock exchanges. The Government often has policies to encourage as well as help the new enterprises. The advantage of the Government aid is organization can have lower interest rate, and the time of refunding money is quite long or zero interest rate. However, to get the Government aid, the enterprises have to meet a lot conditions such as operating at areas that the Government encourages. Franchise Franchise helps the franchisors have a lot of benefit.
The brand will be developed as well as gain the profit through license fee or a negotiated percentage of profit made by franchisees. However, form of franchise just can be applied in big firm or cooperation, because at that time, there are people want to buy that brand to business. In other word, franchise just happen with big firms because their brands have high vaue, and people want to take advantage of those value to reduce to marketing cost, or have existing reputation. Therefore, Nanda Home cannot use franchise to mobilize capital, because it's just a new enterprise on the market.
Leasing Nanda is owner of Nanda Home, thus to maintain business of Nanda Home, she can lease personal asset as her personal property to get money. The advantage is Nanda Home is not under the pressure of pay interest or dividends. The disadvantage is rental is not enough for her to manage the business. Issue cooperate bond Compared with bank loans, raise capital through bonds have some advantages like not to have collateral and are actively raising money to use without the supervision of banks.
Businesses only pay interest for a term of six months or a year and repay principal at maturity. Bond interest is not dominated by interest rate ceilings should be attractive for investors. 1 However, small-scale release of bond can reduce liquidity of bonds, causing investors afraid to buy. There are cases where bonds are sold out, but 70% is due to the banks underwriting purchase. And if released successful businesses also pay higher interest on bank loans2. Thus, a small enterprise like Nanda Home take more risk and disadvantage when issue bond to raise fund.
III, Recommendation for Nanda Home In my view, to raise capital effectively, Nanda Home has to change legal form to company by selling its shares to other people firstly. Because of legal form, company shareholders have limited liability. In other words, Nanda have can raise capital without personal financial risk. Those risks appear when Nanda Home borrows large amounts of capital from bank as a sold trader. By selling share, Nanda Home can have permanent capital, it don't have to pay back as loans. In addition, Nanda can also raise capital from retained profits.
It's obvious that dividend income for shareholders will be less. It can make shareholder unsatisfied but Nanda Home can persuade them by persuadable strategy or arguments as well. Otherwise, Nanda Home has to balance between the retained profit and dividend income. After equalization, to expand business or take innovation, build up retail network, etc. , Nanda Home can borrow money from Bank. At this time, because of this legal form of Nanda Home, Gauri Nanda liability will be limited, because Nanda Home is considered as a separate person- artificial person. The personal financial risk will be lower.