Business Finance and the Capital Structure
FIN 100
Strayer University
August 4, 2014
Business Financing and the Capital Structure Small business can finance their firms through debt or through equity sources of capital. Debt sources typically include; short or long-term loans from wealthy individuals to banks, while equity sources often include the owner’s wealthy individuals and/or Angel Networks. Venture capital is not a typical source of equity financing for most small business, as these businesses will not have the required growth potential Venture Capitals need to manage their risk return requirements.
Explain the process of financial planning used to estimate asset investment requirements for a corporation.
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Efficiency seeking: Multinational companies may also seek to recognize their overseas holding in response to broader economic changes. For example, the creation of a new free trade agreement among a group of countries may suddenly make a facility located in one of those countries more competitive, because of access for the facility to lower tariff rates within the group.
Explain the historical relationships between risk and return for common stock versus corporate bonds. Explain how diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course. Corporate bonds hold the lowest risk of the two types of investments. The main reason for this is that in the event of bankruptcy, corporate bond holders have a stronger claim to payments than holders of common stock. Common Stock carries the highest risk, because holders are last to be paid in the event of bankruptcy. The risk of investing in a single risky security, such as common stock or corporate bond, is very high due to the company specific risks. Any number of unfortunate events could impact the rate of return. Unsystematic risk can be eliminated by holding a broad portfolio of risky assets; e.g., many different securities in many different industries. The risk that remains after diversifying away unsystematic risk is systematic risk. A total stock or bond market fund has systematic risk. This
6. Do bonds reduce the overall risk of an investment portfolio? Let x be a random variable representing annual percent return for the Vanguard Total Stock Index (all Stocks). Let y be a random variable representing annual return for the Vanguard Balanced Index (60% stock and 40% bond). For the past several years, assume the following data. Compute .
Greene Sisters has a DSO of 20 days. The company’s average daily sales are $20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.
Financing is a process of providing additional capital by investor or financial institution to the strapped for money entrepreneurs for companies’ needs such as inventory or equipment purchase, advertising campaign, development, etc. If truth be told, alternative
This paper will describe the different types of funding available to begin a business. These include borrowing money, selling stock, and technology licensing. This paper will discuss the meaning, function and importance of the stock market, investment banking, financial management, and risk financing. This paper continues with a scenario with a future business owner and the decision making of how to fund his business. This paper concludes with a decision on what type of funding he should chose for his business and the advantages and disadvantages behind that decision.
Since I have estimated that I will need $1,000,000 to finance my business I have to now think of how I am going to raise this capital, the different ways to raise capital, would fall under two categories – equity and debt financing. I will begin to sell ownership shares of my business by approaching investors, I already have a friend who has informed me that she would be interested in my venture and would be willing to invest $100,000 in my business, I have my family too that has pledged to help me financially. I can ask them to become equity investors in my business; I could offer them a share in the ownership of my business. Depending on the success of my company I could agree to issue dividends to them too. Various governments also give out loans to new businesses, called small business loans to encourage new
In the sphere of small business financing, two categories of individuals are pertinent in the overall scheme of financing, they are those that invest their monies, as well as, the individuals that lend monies (Hodgetts, 2007). These two modes of funding produce the same results, which is the provision of the necessary capital needed to begin the business adventure of the individual. However, funding can at times be difficult to procure as reiterated by Nicole Taylor (2015), in her article “14 Creative Financing Methods for Startups. She offered numerous ways to procure these funds, such traditional loans, renting one home to others, credit cards, equity, online lending institutions, family and friends, as well as others. However, the dilemma remains, which way offers the best choice for the individual.
Obtaining venture capital financing can provide a startup or young business with a valuable source of guidance and consultation.
Bonds and stocks will not respond in the same technique to adverse events. A mixture of asset classes will reduce the portfolio's sensitivity to market strikes. In general, if portfolio is diversified across bond and equity markets that they move in opposed directions, unpleasant movements in one will be counterbalance by positive outcomes in another. Finally, diversification can help an investor to manage risk and to reduce the instability of an asset's price movements and the risk cannot be eliminated completely, only can reduce the risk related with individual
4. Venture Capital, this is an external source of finance in which a company may look for an investor to invest large sums of money in exchange for a large portion of the company.
There are two types of capital that can be raised, debt and equity. Now some would think that as long as there are funds there to work with, regardless of how they were procured, the end result would be the same. However, that is not the case. Debt financing and equity financing have significant differences in how they affect the business’s bottom line and in how they are acquired. For instance, the interest paid on a business loan (option for debt financing) is tax deductible, therefore decreasing the amount of taxable income and increasing overall
To make the business viable for the years next few years if the business will expand its operations, the business may need to raise additional 60% external financing from debt, implying that a proportion of the capital is funded by debt. The remaining 40% is sourced by increasing the reinvesting the profits of the business and obtaining venture capitalist investors to complete the financing needs of the business.
“Market wide new is news about the economy as a whole and therefore affects all stocks. For instance, the federal reservce might announce that it will lower interest rates to boost the economy” (311). Fluctuations of a stock's return that are due to market wide news are common risk. All stocks are affected by this news. Common risk is also referred to as systematic risk. Since systematic risk affects all firms, it cannot be eliminated through diversification.
For the globalization of competitors, companies are aware that if they leave companies overseas too long without challenge or competition, their investments or foreign operations in the world market may be so solid that competition will be difficult. Therefore, they try to act quickly.
Venture capital(VC), which is known as the risk investment, shows significant role in promoting the SMEs in raising finance. VC includes business angel financing, relationship lending and so on. All of them are good choices for SMEs, specifically for the small and medium companies which are just starting up.(Dagogo, 2009) “Venture capital is the fuel for high potential growth firms, especially in the United States. New venture survival is tenuous at best, but those backed by venture capitalists tend to achieve a higher survival rate than those that are not.” said by Robert(2010), moreover, in his study shows “ survival for venture capitalists backed ventures range from around 65 percent to 85 percent of the venture capitalists’ portfolio.” If SMEs managers can get help like this, they would have more chances to develope. Having a overview on the SMEs, they have nothing but the companies, without large amount of capital or collaterals.VC might be a better method of
The term ‘Venture Capital’ is associated with the funding of start-ups by venture capitalists, which show potential to make it big in the future. The venture capitalists earn by getting ownership equity in the firm. The main of form of venture capital investments begin after the initial seed funding. Venture capital is essential for the companies who focus on novel ideas, because it is difficult to get a loan from banks for it.