ASSIGNMENT 2 - BUSINESS FINANCING AND THE CAPITAL STRUCTURE

Assignment 2 - Business Financing and the Capital Structure



Assignment 2 - Business Financing and the Capital Structure

1. Explain the process of financial planning used to estimate asset investment requirements for a corporation. Explain the concept of working capital management. Identify and briefly describe several financial instruments that are used as marketable securities to park excess cash.

The payback - this method specifies the expected number of years as necessary to compensate for the expenses incurred for the project income earned during operation. Among the options under consideration is the most effective, which is the shortest payback period. This method does not take into account changes in the value of money over time.

Simple rate of return method - a method that expresses the ratio of annual net surplus obtained from a particular project to the incurred average (annual) effort and tells you how much lined up investor capital returns over the years in the form of income.

The method of accounting rate of return - AMA (ang. Accounting Rate of Return) - this method is a measure that expresses the relationship between the Company's net income (net profit) and the amount of capital invested in the project.

The method of net present value - NPV. (Called Net Present Value) Net present value obtained by discounting, separate for each year, the difference between inflows and outflows of cash over the life of the facility, is one of the basic and probably the most complete method of assessing the profitability of investment projects. Net present value obtained by discounting, separate for each year, the difference between inflows and outflows of cash over the life of the facility, is one of the basic and probably the most complete method of assessing the profitability of investment projects (Savvides, 1994).

Working Capital Management

Working capital management is carried out in order to ensure short term liquidity that company can meet its obligations of which might incur at anytime. It involves the payments to creditors, receiving payments from debtors and maintaining adequate levels of inventory. Adequate levels of inventory are necessary to maintain because, excess cash tied in company's inventory will lead to delay in payments which will upset the creditor and also will hinder the short term cash requirements of the business. Along with that inventory costs start incurring which will impact the bottom line of the company. Creditors should be handled in a way that the company should be asking for late payments. Debtors should be asked to clear the dues immediately because it will enhance the cash position of the company (Schawel & Billing, 2012).

2. Assume that you are financial advisor to a business. Describe the advice that you would give to the client for raising business capital using both debt and equity options in today's economy.

As a financial advisor I will be providing the client to maintain a ratio of 60/40. 60 percent equity and 40 percent ...