Managing Financial Resources and Decisions



Managing Financial Resources and Decisions

ANSWER TO QUESTION 1

Answer 1.1:

There can be two major ways through which Hazzlewood Sandwich can finance, which is equity financing and debt financing (Jordan 2008 pp. 15 - 45). Both of these major financial resources have different implications with them and the decision to finance the company depends on the situation and different scenarios that a company is facing. Following are the implication with each type of financing.

Equity financing

There are two fundamental ways of raising equity finance; the issuance of the company stocks to the venture capitalists or investors, and by publically offering company stocks to the investors. When capital is raised through equity financing it involves the selling of partial interest in the firm to the shareholders. (Olsen, R. 1998 pp. 10-18)In return of the investment that the shareholders made they receive the equivalent number of shares and ownership in the company. The equity financing is done when company is seeking to raise more cash; the company desires to float more shares in the market, and the company desires to increase the market share by issuing and floating shares to the shareholders of other companies.

Debt financing

The strategy of the debt financing involves the acquisition of funds from the investor or lender with the agreement and understanding that the complete amount will be re-paid in the future by the company on pre-defined terms (Nofsinger, 2008, pp.11-55). Normally, in debt financing the lender or the investor is not entitled any ownership of the company like we discussed in the equity financing. The interest rate charged by the lender is the return for the lender in this case. There are different ways of obtaining funds through debt financing such as by issuing convertible bonds, private bonds, convertible debentures, leveraged buyouts and different industrial development bonds (Boatright, J. 2000 pp. 201-219). Although the most commonly used way is by taking a regular loan (short term and long term).

Answer 1.2:

The advantages as well as the disadvantages of equity financing and debt financing (loans and debentures) are listed below:

Equity Financing

Advantages

The company don't have the direct obligation to pay back the invested amount to the shareholders with in a limited time period like in debt financing.

The share holders become the owners and partners of the company and they share the profit and loss of the company.

No fixed liability on the company as compared to the debt financing.

Disadvantages

It's a time consuming and costly affair.

The involvement of the shareholders in the decision making may potentially disturb then management of the company and its decisions.

The potential complication of the legal affairs of the company and it may raise different compliance issues as well.

Debt Financing (Loans and Debentures)

Advantages

No fragmentation of administrative powers and management which ensures the smooth operations of the company.

No profit sharing with the share holders enables maximization of the profit to the owners.

Because of the occurrence of the interest charges on the loan amount, the company enjoy the tax benefits and decreases the tax liability of the ...