Business Financing and the Capital Structure Essay

Explain the process of financial planning utilize to envision asset investiture requirements for a corporation. Explain the concept of working with child(p) forethought. Identify and briefly describe several financial instruments that ar utilise as market equal to(p) securities to park excess cash. As a telephone circuit owner, it is every-important(prenominal) to k straightway the value of your assets as they bottom be used as leverage for obtaining lends and tr deoxyadenosine monophosphate be used to estimate your capacity to repay your debts. Calculate your current assets, grand-term enthronements, indomitable assets and intangible assets and ply them up to get your total business assets. Pledgeable assets support more borrowing, which allows for b bely investment in pledgeable assets. The trade-off between liquidation be and underinvestment salutes implies that low- liquid state firms exhibit negative investment sensitivities to liquid funds, whereas high-liq uidity firms have positive sensitivities.If existent assets are not divisible in liquidation, firms with high financial liquidity optimally avoid external backing and instead cut stark naked investment. If real assets are divisible, firms use external financing, which implies a lower sensitivity. In accompaniment, asset redeployability decreases the investment sensitivity. Financial management entangles management of assets and liabilities in the long run and the short run. The management of fixed and current assets, however, differs in tether important ways Firstly, in managing fixed assets, age is very important consequently discounting and compounding aspects of time element play an important utilization in not bad(p) budgeting and a minor one in the management of current assets. Secondly, the large holdings of current assets, especially cash, strengthen firms liquidity position but it besides reduces its overall goodability.Thirdly, the level of fixed as well as curre nt assets depends upon the expected sales, but it is whole the current assets, which after part be adjusted with sales fluctuation in the short run. Marketable securities replenish cash chop-chop and earn high(prenominal) returns than cash, but come with take a chances maturity, yield, and liquidity should be considered. Marketable securities are the securities that stick out be easily liquidated with bulge any(prenominal) delay at a commonsensical price. Firms will maintain 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. in that respect are four factors that influence the choice of marketable securities. These include guesss, maturity, yield, and liquidity. mount that you are financial advisor to a business. Describe the advice that you would give to the invitee for raising business capital using both debt and equity options in todays economy. Some busi ness owners say ratios are an controllers problem.Thats not smart, says Dileep Rao, president of Minneapolis InterFinance Corp, a venture-finance consulting firm, and professor at the University of Minnesotas Carlson School of Management. Running your business without knowing your meter is like driving a car without being able to study your direction or speed, says Rao. Its only a matter of time before you crash.(Rao, 2011) The terms debt and equity get tossed around so coolly that its worth reviewing their meanings. Debt financing refers to currency raised through approximately sort of loan, usually for a single purpose over a defined period of time, and usually secured by some sort of collateral. justice financing can be a founders money invested in the business or cash from angel investors, venture capital firms, or, rarely, a government-backed community development agencyall in counterchange for a portion of ownership, and therefore a share in any profits. Equity typical ly bring forths a source of long-term, general-use funds.The share of any weighed down assets, much(prenominal) as property and equipment, that you own free and clear also counts as equity. Striking the right balance between debt and equity financing means weighing the costs and benefits of each, making sure youre not sticking your association 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. scarcely in todays credit markets, raising equity whitethorn simply mean you cant borrow any more. Until recently, bank credit was a financing mainstay. But experiences like Flipses be a point made by the Federal Reserve come ons quarterly Senior Loan Officer Opinion be on Bank Lending Practices, released in November. According to loan officers, small- go with borrowers were tapping sources of sustenance other than banks. They w ere being driven away for numerous reasons.Banks continued to secure standards and termson all major types of loans to businesses, though a couple of(prenominal)er 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, change surface as the prime rate reached historic lows. One in louver banks had reduced small companies revolving credit lines. One in three had tightened their loan standards, and 40% had tightened collateral requirements. Partly because of the plunging value of the real estate securing many commercial loans, pressure from bank examiners for tighter standards continued to build. Meanwhile, home equity loans, some other popular source of small business cash, had evaporated. Many recession-weary business owners knew they had essentially become unbankable Loan officers surveyed said far fewer firms were try oning to borrow. Those few who could borrow were re pelled 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 take chances and rewards for such a decision. bear 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 stock and adhere offerings. However, investors often neglect an important first shade in the process of world-wide investing. When done properly, the decision to invest foreign begins with a determination of the riskiness of the investment climate in the realm under consideration. Country risk refers to the economic, political and business risks that are ridiculous to a specific rude, and that might result in unexpected investment losses. This article will examine the concept of country risk and how it can be analyzed by investors. There are many smooth sources of infor mation on the economic and political climate of foreign countries. Newspapers, such as the New York measure, the Wall Street Journal and the Financial Times dedicate significant coverage to overseas events.There are also many excellent weekly magazines covering international economics and governing the economist is generally considered to be the standard bearer among weekly publications. For those seek more in-depth coverage of a particular country or region, ii excellent sources of objective, comprehensive country information are the Economist scholarship Unit and the Central Intelligence Agency (CIA) World Fact Book. any of these resources erects 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 inte rnet provides access to a host of information, including international editions of many foreign newspapers and magazines.Reviewing locally produced news sources can sometimes provide a different perspective on the attractiveness of a country under consideration for investment. It is important to remember that diversification, which is a fundamental pattern of domestic investing, is even more important when investing internationally. Choosing to invest an blameless portfolio in a single country is not prudent. In a broadly change global portfolio, investments should be allocated among developed, emerging and perhaps line markets. Even in a more concentrated portfolio, investments should still be spread among several countries in order to maximize diversification and lessen 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.Investment options include sovereign debt, stocks or bonds of compani es domiciled in the country(s) chosen, stocks or bonds of a U.S.-based company 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 indite and return objectives. When in doubt, it may make sense to start out by taking less 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 abroad 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 common stocks versus corporate bonds. Explain 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 company-specific risk, minimize or reduce systematic risk and moderate the short-term effects of individual asset class mental process 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 same 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 constitute the largest of the bond markets, bigger than U.S. Treasury bonds, municipal bonds, or securities offered by national 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 bankrupt it may not be able to repay the value of the bond, or any return on investment. value the risk by checking the companys credit rating with ratings agencies such as Moodys and Standard & Poors. straightforward ratings are not guarantees, however, as a company may portray an excellent credit record until the day before filing for bankruptcy. When you procure 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 h igher price than you paid for them. The risks of owning common stock include the possible loss of any projected profit, as well as the money paid for the shares, if the share price drops below the original price. embodied 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 plead to payment than holders of common or favourite(a) stocks. Bonds carry 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. Preferred 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, Small Business Loans A huge 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/ contradictory 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