FINANCIAL MANAGEMENT

Financial Analysis and Management

Financial Analysis and Management

Introduction

Long term finance sources are that sources which are needed for a longer period of time, usually over one year. The reasons for raising long term finance are totally different from the short term finance. Long term finance usually required for expansions of projects. Such projects need billions of pounds investment that are raised by different long term sources of finance. The long term finance sources include shares, venture capital, government grants, bank loans, mortgage, owner's capital, retained profit, selling assets and lottery funding. In the given situation the mortgage, funds from investors, grants or loans from government or the other organization and venture capital (Beck et.al, 2000, pp.261-300). We will critically evaluate these four sources in the paper, keeping the context of efficient capital structure.

Discussion

Capital structure is a mixture of company's short term debt, long term debt, preferred equity and common equity. Capital structure shows that how a company finances its overall growth and operations by utilizing different fund's sources. An optimal capital structure offers the ideal combination of debt and equity financing and lower cost of capital. Debt financing gives low cost of capital because of deductibility of tax, but it also increase the risk to the company (Rioja & Valev, 2004, pp.127-140).

Financing by Shares

Shares are a part of company's ownership. Public Limited Companies (PLC) and Private Limited Companies issue shares. Shares are the most reliable source of raising long term funds. When companies go for expanding their business in the same country and foreign market, they usually need billions of pounds to set up the expansion plan.

Advantages

There are many advantages of raising funds through the issuance of shares. First of all it is a permanent source which is not subjected to pay back. As the shares are issued against the share capital that is why company does not have any need to pay back the amount. Beside this advantage, the allocation of dividend is merely relying on the intentions of boards of director and the profits that a company makes. There is not any kind of fixed burden of interest and dividend like the Preference shares. The issuance of share does not affect the assets and liabilities of the company. If a company wants to expand its business in any foreign market than the company can use this source for raising funds. As the company issues shares there is not any kind of effect on the company due to the fluctuation in the inflation rate and prevailing interest rate in the market. The company can also take advantage of charging high premium because the market will push the price of share upward on the news of business expansion in foreign markets. Investors will automatically invest in the company on the news that may reduce the risk of underwriting of shares.

Disadvantages

As there are many advantages of raising funds by issuance of shares, there are some disadvantages as well. First of all company can face the problem of ...