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African Journal of Finance and Management

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Corporate Finance: Overview of Company Financing in Tanzania

Betty Machangu

Abstract


Companies operating, as commercial entities must have sufficient cash balances to facilitate their smooth operations. Cash requirement can be raised from different sources, ranging from equity, various forms of debt, to internally generated funds through retained earnings which would otherwise be distributed to shareholders (Myers and Myers, 1991; J. Gitman, 1991). These sources are broadly classified into internal and external; while internal financing does not embrace financing costs, external financing takes into consideration the way finance is raised. Each of these methods carries a cost to the firm and risk to investors.

As debt increases, shareholders as residual claimants bear this risk through dividend volatility. This has certain implications in terms of costs as the higher the risk the higher the return to compensate for increased risk. This paper evaluates various sources of finance available to Tanzanian companies and their relative costs. Whereas companies in the developed world have different sources from which they can raise finance, developing countries have limited and undeveloped sources.

The financial system is explained in terms of what it offers in the finance function. The role of financial system, including its efficiency to corporations is examined. The long run interrelationship between economies, interest rates in particular, is illustrated to show how they are reflected in finance costs. The effects of financing policy in terms of costs is also examined, including the costs associated with getting finance from all available sources. These sources are compared and contrasted to United Kingdom (country from which Tanzania inherited most of its financial system as former colony) sources to evaluate the most cost-effective. The basic Miller and Modigillian theories on finance are reviewed to assess their applicability and impact on firm operations in Tanzania.
African Journal of Finance and Management Vol.12(1) 2003: 96-108



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