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…
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 ...
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The process of financial planning adopted by corporations include a method of evaluating the present value of the company, expected growth of assets anticipated future expenses. Working capital management Working capital management involves maintaining optimum level of current assets and cash by the corporation in order to meet the short term liabilities.
The statements may be prepared in certain future period and enable the manager fund required. ?The funds required are determined: after drawing the projections in terms of marketing activities, sale of products and the production cost, finance manager draws up a plan of the required funds depending on the time factor.
Lastly, the firm will decide which method of financing the organization will use to acquire the necessary assets to meet with production demands. Consequently an organization can use the available information in order to create the projected income statements and balance sheets as well as estimating the earnings per share, dividends per shares, as well as forecasting key financial ratios and measures in order to determine the viability of the new project.
"The first Family Dollar store was opened in Charlotte, NC, in 1959. It was a relatively small, self-service operation located in a neighborhood convenient to low and middle income consumers. The merchandise assortment featured basic goods for family and home needs" (Family Dollar).
They also recommended that an ideal capital structure of a firm is with all debt with cheaper debt finance than higher cost & riskier equity but an optimal capital structure exists in which the terms of debt financing & such other real world problems of debt financing (like bankruptcy due to high debt) and tax savings of the debt financing are balancing factors (Modigliani and Miller.
The most important consideration is what form of capital structure would be most helpful in maximizing the firms value. This paper seeks to address the issue of what constitutes an optimal capital structure, and what
As opposed to debt financing, equity financing provides the much needed moneys, without the ‘draining’ concern and hassle of either repayments or interest accrued from the loan.
There are several advantages to using equity in raising
Respectively, I conjure that varied capital sources are typically based on different costs and thus, needed appropriate analysis for designing an optimal capital structure for raising required finance appropriately (Grundy, n.d.).
In businesses, sources of
Equity capital comes from personal savings, friends, and family members.
The business owners have nothing to pay back to investors. There is availability of cash to grow the business since there are no interests from loans. The investors involved offer
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