Chapter 10, Problem 1AA

To determine

Different options available to the company to pay for an expansion.

Answer to Problem 1AA

The importance of financing lies in the fact that it provides the company the money they need to survive the market.

Explanation of Solution

For an efficient working of a business, finance is the key factor. The channelization of funds, profit coming to the company, daily flow of cash, etc. are all aspects of financing. Finance helps the firms to wisely utilize their money.

If a manufacturing business wants to pay for an expansion then it must go for financing. There are different ways through which it can support expansion:

1. Debt financing is the opposite of equity financing. In it, the ownership lies with the lender of the money. Debt financing just requires borrowings from lender for a decided time and pay it back with interest.

2. Short term financing is a form of debt financing. It is important as it is the base of starting any business if one does not have much funds.The repayment of the loan is generally to be done within 12 months.

3. Intermediate term financing is a type of financing which allows the repayment of debt or loan to be done in more than 1 year and less than 10 yrs. It becomes important as it offers adequate time to make the repayment.

4. Long term financing is a type of debt financing which focuses on long term strategies of a company and provide a maturity period of more than 1 year for a debt or loan taken.

While deciding the expansion project, the company should conduct a cost- benefit analysis which will help them in analyzing the benefit caused from investing in a particular project.If the benefit is high from less cost, one would choose that option otherwise would go for the other one.

Revenue will be the total income which the company will be able to earn through sale of goods and services done after the expansion is accepted and when all the expenses and other costs including financing costs are subtracted from it, the company will get its profit or net income.

Economics Concept Introduction

Introduction:Financing is the procedure through which the companies are granted money to help them use such money in carrying out their businesses.