Business

Business

Business

Task 1

Introduction and Rationale

There are several risks when an organization decides to borrow money for financing. However, the finance department is there to consider all the factors when borrowing. If the project is fail or unable to pay there are risk of borrowing. The interest rate is the main factor while borrowing finance. This first task of this assignment is to discuss financial resources of a business, since there is always a huge risk involved with borrowing funds.

Finance as Resource

Finance  is a system of monetary relations, expressing the formation and use of funds in their circulation. Finance is the major backup for any project. A project is incomplete without finance.

Risk and Accessibility

Risk is the probability of an adverse event and its consequences. Financial risk refers to the probability of occurrence of an event that has negative financial consequences for an organization (Jiambalvo, 2001, p.100).

However, every business does not have the accessibility to take risk and borrow huge funds. Lending institutions make risk analysis and may not be willing to grant loan to a small profile business. Such business does not have any strong financial background that may prove its credibility, thus they find difficulty in accessibility of borrowing funds from banks (Jones, 2006, 45).

Level of Risk

Every organization has different appetite for risk. Any business owner may borrow huge funds but he must make sure that his business can generate enough cash to pay off regular interest payments and the principal payment. However, if an organization has various assets then the business is at minimal risk as it can pay the interest and principal amount from his assets even if the business incurs loss.

Risk and Rate of Return

The return rate is typically presented as a percentage of change over the given time (Melicher et.al, 2007, 10-25). In terms of borrowing money, if the lender considers that high risk is involved in lending the money then he may charge higher interest rate. This is also known as credit risk.

Individual Project Risk

The lender institutions are usually commercial banks. They have an expert credit analysis team that analyses each project before approving the loan transaction. In the cases of large organizations, banks can check their credit rating and assess the level of individual project risk. Then accordingly they may decide higher interest rate charge for higher risk projects and lower interest rate charge for lower interest project. One of the common measure to assess the credit risk of the company is credit ratings published by rating agencies Moody's, S & P, Fitch IBCA.

Finance Costs

Finance cost is a capital cost. All costs to a company in connection with the financing of a fund is a finance cost.

Ordinary and preferred stock

A firm can raise its funds either by equity or by debt. In equity instrument there are stocks and preferred stock. Ordinary stocks are pure equity instrument where as preferred stock are consider to be hybrid instrument which contain the characteristic of equity as well as debt ...