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Chapter 15

Selection of appropriate sources of

finance

Firms need finance to:

 provide working capital

 invest in non-current assets

Criteria for choosing a source of finance:

 cost – debt is usually cheaper than equity

 Duration – long-term finance is more expensive but more secure than short-
term

 Term structure of interest rates – yield curve. Short-term usually cheaper but
not always

 Gearing – what is current level? Adding debt is usually cheaper than equity but
high gearing is risky

 Accessibility – not all sources available to all firms

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