Business Financing and the Capital Structure Essay

exempt the accomplish of monetary planning utilise to estimate asset investing descents funds requirements for a corporation. Explain the c oncept of working cap management. Identify and pithyly describe several financial instruments that argon used as marketable securities to park excess interchange. As a pipeline owner, it is eventful to sack out the value of your assets as they basin be used as supplement for obtaining loans and keister be used to estimate your ability to repay your debts. drive your current assets, long-term investments, fixed assets and intangible assets and add them up to take up your total phone line assets. Pledgeable assets support much borrowing, which allows for further investment in pledgeable assets. The trade-off between liquidation constitutes and underinvestment costs implies that low-liquidity firms exhibit ban investment sensitivities to liquid funds, whereas high-liquidity firms have positive sensitivities.If real assets are non divisible in liquidation, firms with high financial liquidity optimally forfend external financing and instead cut new investment. If real assets are divisible, firms use external financing, which implies a glower sensitivity. In addition, asset redeployability decreases the investment sensitivity. Financial management includes management of assets and liabilities in the long run and the short run. The management of fixed and current assets, however, differs in one-third important ways Firstly, in managing fixed assets, time is very important consequently discounting and compound aspects of time element play an important role in capital budgeting and a minor one in the management of current assets. Secondly, the deep holdings of current assets, especially bills, strengthen firms liquidity correct but it also reduces its overall profitability.Thirdly, the level of fixed as tumesce as current assets depends upon the expected sales, but it is only the current assets, whic h can be adjusted with sales fluctuation in the short run. salable securities replenish cash quickly and earn higher restitutions than cash, but count with risks maturity, yield, and liquidity should be considered. Marketable securities are the securities that can be soft liquidated without any delay at a reasonable impairment. Firms volition exercise levels of marketable securities to ensure that they are able to quickly replenish cash balances and to obtain higher returns than is possible by maintaining cash. There are quadruplet factors that influence the choice ofmarketable securities. These include risks, maturity, yield, and liquidity. Assume that you are financial advisor to a calling. Describe the advice that you would give to the client for raising business capital using both debt and equity options in at presents economy. any(prenominal) business owners say ratios are an accountants problem.Thats not smart, says Dileep Rao, president of Minneapolis InterFinance C orp, a venture-finance consulting firm, and professor at the University of Minnesotas Carlson School of Management. Running your business without knowing your numbers is like effort a car without be able to see your direction or speed, says Rao. Its only a matter of time before you crash.(Rao, 2011) The hurt debt and equity get tossed around so casually that its expenditure reviewing their rigorousings. Debt financing refers to money raised through some sort of loan, normally for a item-by-item purpose over a defined intent of time, and usually secured by some sort of col youngral. Equity financing can be a founders money invested in the business or cash from angel investors, venture capital firms, or, rarely, a government-backed fraternity development agencyall in exchange for a bunch of ownership, and therefore a share in any profits. Equity typically becomes a spring of long-term, general-use funds.The share of any hard assets, such as property and equipment, that you o wn free and clear also counts as equity. contact the right balance between debt and equity financing performer deliberateness the costs and benefits of for each one, making sure youre not sticking your caller-out with debt you cant afford to repay and minimizing the cost of capital. Choosing debt forces you to manage for cash flow, while, in a perfect world, taking on equity means youre placing a priority on growth. But in to daytimes credit markets, raising equity whitethorn simply mean you cant borrow any more. Until recently, bank credit was a financing mainstay. But experiences like Flipses underlie a auspicate made by the Federal Reserve Boards quarterly Senior contribute Officer Opinion Survey on vernacular Lending Practices, released in November. According to loan officers, bitty- corporation borrowers were tapping sources of funding other than banks. They were being driven away for many reasons.Banks continued to tighten standards and termson all major types of loan s to businesses, though fewer were doing so than in late 2008, when tightening was nearly universal. Interest rates on small business loans were on the rise at 40% of the banks surveyed, even as the choice rate reached historic lows. One in five banks had reduced smallcompanies revolving credit lines. One in three had tightened their loan standards, and 40% had tightened related requirements. Partly because of the plunging value of the real estate securing many commercial loans, wardrobe from bank examiners for tighter standards continued to build. Meanwhile, home equity loans, another popular source of small business cash, had evaporated. galore(postnominal) recession-weary business owners knew they had essentially become unbankable Loan officers surveyed said far fewer firms were seeking to borrow. Those few who could borrow were repelled by higher rates. All of a sudden, equity financing looked better. Explain why a business may decide to seek capital from a foreign investor indicating the risk and rewards for such a termination. Provide support for rationale.Many investors choose to place a portion of their portfolios in foreign securities. This decision involves an analysis of various mutual funds, exchange-traded funds (ETF), or tune and shackle offerings. However, investors often neglect an important first step in the process of world-wide investing. When done properly, the decision to invest overseas begins with a finish of the riskiness of the investment climate in the country under consideration. landed estate risk refers to the economic, political and business risks that are unique to a peculiar(prenominal) country, and that might result in unexpected investment losses. This article will examine the concept of country risk and how it can be canvas by investors. There are many clear sources of information on the economic and political climate of foreign countries. impudentspapers, such as the New York Times, the Wall Street Journal and t he Financial Times dedicate probatory reportage to overseas events.There are also many excellent weekly magazines covering international economics and politics the Economist is enormously considered to be the standard bearer among weekly publications. For those seeking more in-depth coverage of a particular country or region, two excellent sources of objective, cosmopolitan country information are the Economist Intelligence social unit and the aboriginal Intelligence Agency (CIA) World Fact Book. Either of these resources provides an investor with a broad overview of the economic, political, demographic and social climate of a country. The Economist Intelligence Unit also provides ratings for most of the worlds countries. These ratings can be used to supplement those issued by Moodys,S&P, and the other traditional ratings agencies. Finally, the profits provides access to a host of information, including international editions of many foreign newspapers and magazines.Reviewing topically produced news sources can sometimes provide a different prospect on the attractiveness of a country under consideration for investment. It is important to remember that diversification, which is a fundamental principle of domestic investing, is even more important when investing internationally. Choosing to invest an entire portfolio in a single country is not prudent. In a broadly diversified globose portfolio, investments should be allocated among developed, emerging and perhaps limit markets. Even in a more concentrated portfolio, investments should still be spread among several countries in order to maximize diversification and smirch risk. After the decision on where to invest has been made, an investor has to decide what investment vehicles he or she wishes to invest in. enthronisation options include sovereign debt, stocks or bonds of companies domiciled in the country(s) chosen, stocks or bonds of a U.S.-based telephoner that derives a significant portion of its revenues from the country(s) selected, or an internationally focused exchange-traded fund (ETF) or mutual fund. The choice of investment vehicle is dependent upon each investors individual knowledge, experience, risk profile and return objectives. When in doubt, it may make sense to start out by taking little risk more risk can always be added to the portfolio at a later date. In addition to thoroughly researching prospective investments, an international investor also needs to monitor his or her portfolio and adjust holdings as conditions dictate.As in the U.S., economic conditions overseas are constantly evolving, and political situations afield can change quickly, particularly in emerging or frontier markets (Forbes, 2011). Situations that once seemed promising may no longer be so, and countries that once seemed too risky might now be viable investment candidates. Explain the historical relationships between risk and return for honey oil stocks versus embodied bonds. Expl ain how diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course.Portfolio diversification is the means by which investors minimize or eliminate their exposure to club-particular proposition risk, minimize or reducesystematic risk and moderate the short-term do of individual asset class performance on portfolio value. In a well-conceived portfolio, this can be accomplished at a minimal cost in terms of expected return. Such a portfolio would be considered to be a well-diversified. Although the concepts relevant to portfolio diversification are customarily explained with respect to the stock markets, the comparable underlying principals apply to all types of investments. For example, corporate bonds have specific risk that can be diversified away in the same manner as that of stocks. Bonds issued by companies represent the largest of the bond markets, bigger than U.S. exchequer bonds, municipal bonds, or securiti es offered by federal agencies (Worldbank, 2013).The risk associated with corporate bonds depends on the financial stability and performance of the company issuing the bonds, because if the company goes reveal it may not be able to repay the value of the bond, or any return on investment. Assess the risk by checking the companys credit rating with ratings agencies such as Moodys and Standard & Poors. Good ratings are not guarantees, however, as a company may show an excellent credit record until the day before filing for bankruptcy. When you purchase stock in a company during a public offering, you become a shareholder in the company. Some companies pay dividends to shareholders based on the number of shares held, and this is one form of return on investment.Another is the profit realized by trading on the stock exchange, provided you sell the shares at a higher price than you pay for them. The risks of owning common stock include the possible loss of any intercommunicate profit, as well as the money paid for the shares, if the share price drops below the original price. Corporate bonds hold the lowest risk of the three types of investments, provided you choose the right company in which to invest. The main reason for this is that in the event of bankruptcy, corporate bond holders have a stronger claim to recompense than holders of common or preferred stocks. Bonds have got the risk of a lower return on investment, as the performance of stocks is generally better. Common stocks carry the highest risk, because holders are last to be paid in the event of bankruptcy. preferent stocks generally have higher yields than corporate bonds, lower risk than common stocks, and a better claim to payment in the event of bankruptcy.ReferencesDileep Rao. 2011, InterFinance Cambridge, Massachusetts, The MIT Press. Forbes. 2011, itty-bitty Business Loans A Great Option . Retrieved on 6/19/2013 from http//www.forbes.com/sites/ryancaldbeck/2012/11/14/small-business-loans -a-great-option-unless-you-actually-need-money/ Foreign direct investment, net inflows (BoP, current US$) Data Table . Data.worldbank.org. Retrieved 6/19/2013 from http//data.worldbank.org/indicator/BX.KLT.DINV