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2: Business Financing and the Capital Structure - Assignment Example


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2: Business Financing and the Capital Structure

With this information, the payback period may be estimated for a rough expectation of when the investment would break even. Other methods will necessitate the estimation of the cost of money which would serve as the discount rate for time-value-of-money estimations. On the basis of this discount rate, the present values of cash inflows and cash outflows should be calculated and offset to determine the net present value, or the ratios thereof taken for the profitability index. Finally, the internal rate of return can be acquired through the hit-and-miss estimation method. Working capital management is based on maintaining appropriate levels of current assets and current liabilities, in such a way as to provide for the timely fulfillment of short-term debt obligations and operating expenses without holding excessive amounts of liquidity that otherwise could be invested. Excess cash may be invested in short term financial instruments (marketable securities) could include short-term debt instruments such as treasury bills and commercial papers, deposits and certificates of deposit, commercial papers, short-term interest rate futures and forward rate agreements. Of these, treasury bills are considered the safest because they are government securities and hold minimal risk. Commercial papers are debt instruments made in favour of private corporations and carry as much risk as the corporation’s ability to repay the debt. Deposits and certificates of deposit are entered with the bank for conversion

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to loans, and hold as much risk as is associated with the bank’s record of performance. Interest rate future and forward rate agreements are considered speculative and would normally not be viable considerations because of their high risk. 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. Raising business capital should take into consideration the nature of the business, its production cycle, its initial capital outlay and the expected time within which it is expected to produce income, and the risk the investors are willing to take. Business capital can be raised either as equity or as debt. The capital structure of the firm should be estimated – that is, how much of their own funds the business owners can raise for themselves (equity) against what they wish to raise as borrowed funds (debt). The higher the leverage or the ratio of debt to equity, the greater the risk of default the business is exposed to. The business is also committed to earn within a shorter period of time because of the need to pay periodic interest on the loan. On the other hand, relying too much on equity will be a greater burden to investors, for which they may seek to expand the shareholder base. Increasing the number of shareholders, however, dilutes the value of the shares and reduces the control of the current shareholders over the business. The risk-return trade-off should be carefully considered by the business owners before they raise the capital for their business. 3.Explain why a business may decide to seek capital from a foreign investor indicating the risk and rewards for such a decision. Provide support for rationale. A business may seek


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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Assignment 2: Business Financing and the Capital Structure essay example
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