Working capital is expressed as the difference between the short term assets and the short term liabilities. Inventory turnover, accounts payable, accounts receivables are considered for working capital management by companies. Financial instruments used as marketable securities to park excess cash The financial instruments used to park excess cash by corporations are bonds and debentures. These are marketable securities as it is possible to convert these securities into cash at any point of time due to large number of buyers available in the market. Raising business capital using both debt and equity options in today’s economy Raising business capital is a crucial aspect of decision making by the companies in today’s economy in the context of global economic slowdown. The options for raising business funds are debt financing and equity financing. A corporation may choose to adopt debt financing by acquiring loans from the market. In debt financing, the corporation would need to pay regular interests till repayment. However, the corporation has the opportunity to reduce interest payment by available tax shields. Debt financing may be adopted as it does not dilute the ownership structure and decision making of companies. Another option of equity financing by corporations may be used to raise capital by share issues. The cost of equity financing is the payment of dividends to the shareholders (Glen and Pinto, 1994, p.28). Although the ownership structure is diluted, the corporation also has the opportunity to the share the risk of investments. The profits earned from the investments are also shared among the shareholders of the corporation. Seeking capital from a foreign investor: risk and rewards Business may seek to raise capital from a foreign investor by entering into strategic alliance and joint venture with the foreign investor. In order to gain competitive advantage in the market that would not have been possible through the use of individual resources and capabilities, corporations decide to share the technologies and expertise of the foreign investor through strategic alliance. The risk of the business is also shared apart from the rewards and profits of the joint business. The risk attached to the raising of capital from foreign investors includes losses due to mismatch of mutual interests in long term prospects. Due to unexpected changes in the international economy, foreign investors may realize losses and loose interest in the local markets. An example of changes in world markets may be due to fluctuation of the currency conversion rates. This would lead to liquidity crunch for which the consumption level in the economy would fall. Due to this risk factor, the productivity of the corporations would fall leading to fall in profitability of the corporations. Common stocks versus bonds: Historical relationship between risk and return, diversification through portfolio formation The historical relationship between risk and return of an investment could be explained by the theory of risk-return trade off. Higher the amount of risk incurred in an investment, higher would be the expected return. On the other hand, a risk-averse investor would like to incur low risk for which the return would also be moderate.
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Business Financing and the Capital Structure Financial planning by corporations for estimation of asset investments Financial planning is a tool used by the corporations to meet the expenses of future with the help of its holdings on assets. Financial planning considers the predicted future cash flows, plans for withdrawal or allocation of funds and changes required in the areas of investment in assets to meet the financial goals…
The process of financial planning for a business corporation includes a method of assessment of the current value of the company, evaluation of the present value of assets of the company, estimated growth of assets of the company and anticipated expenses of the company in future.
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).
The equity investors become part-owners and partners in the business and tend to exercise some control over how the business is run. The capital structure is signified by the firm's debt-equity ratio and gives an insight as to how risky the firm is.
It gives the Weighted Average Cost of Capital (WACC).
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
3 pages (750 words)Essay
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