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Business Financing and the Capital Structure - Essay Example

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Business Financing and the Capital Structure 1. Explain the process of financial planning used to estimate asset investment requirements for a corporation. Explain the concept of working capital management. Identify and briefly describe several financial instruments that are used as marketable securities to park excess cash…
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Business Financing and the Capital Structure
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Business Financing and the Capital Structure

Financial planning of the corporation would include building a plan to meet the expenses of the future through its holdings on assets after considering the predicted future cash flows and plans for withdrawal or allocation of funds. Financial planning help the corporations to understand the changes required in the areas of investment and allocation of assets in order to meet their financial goals. Thus financial planning ensures smooth transition of the financial position of the companies to attain the long term goals in future and also to meet the short term operational need. The process of financial planning is significant for the companies to attain sustainability in a competitive market (Baker and Powell, 2009). Working capital of corporations is the difference between the current assets and current liabilities of the corporation. Working capital management involves maintenance of optimum levels of both the current liabilities and current assets of the corporation. Optimum level of current asset and current liabilities indicate maintenance of sufficient current assets and cash in hand in order to meet the short term liability and expenses for daily operation in an efficient manner. The important ratios that are useful for effective working capital management are inventory turnover, account payables and accounts receivables. The excess cash is parked by businesses through the marketable securities like debentures and bonds that could be converted into cash within a short period of time. The marketable securities for parking excess cash provide a source of high liquidity. The high liquidity requirement could be met by the corporations by use of marketable securities due to the presence of large number of buyers in the market. The financial instruments used to park excess cash are exposed to lesser market risk as these could be transformed into liquid cash at any point of time. 2. Assume that you are financial advisor to a business. Describe the advice that you would give to the client for raising business capital using both debt and equity options in today’s economy. The valuation of companies had become vulnerable from the period of economic recession which turned into a global financial meltdown. Although the situation has recovered to an extent since last year which was backed by performance of the emerging economies, the investors are still circumspect on investing in equities of the companies without doing adequate research. Thus the raising of business capital through a mix of debt and equity options would be suitable for the companies. The equity financing option of raising capital would involve issue of shares to the public for raising funds. The companies would have to share the profits with the increased number of shareholders. The risk of investments, however, would also be shared with investors. The ownership structure of the company would get diluted and the control over business decision making would be reduced. The funds raised through debt financing option are also painful for the companies over a period of time due to the regular interest payments to be done by them. The cost of debt financing, however, would be reduce due to the tax deductibility feature. Due to the tax shields, the companies are in a position to reduce their interest payments. Thus a debt-equity mix strategy for raising business capital is suitable for the ... Read More
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