Contents
INTRODUCTION 2
CORPORATE FINANCE: DEBT VERSUS EQUITY FINANCING 2
CONTRACTUAL NATURE OF DEBT INSTRUMENTS 3
GENERAL CONSIDERATIONS IN DEBT FINANCE 3
PRELIMINARY CONSIDERATIONS BY THE COMPANY 3
PARTIES’ CONSIDERATIONS 4
SECURED LENDING 5
INTRODUCTION
Companies require capital to successfully run their operations and scale-up their growth trajectory.
The sources of this capital may either be internal (contribution from shareholders in the form of equity; ploughed back revenue et cetera); or they could external (borrowing from banks; private equity firms; development finance institutions; capital markets et cetera).
Debt finance is one example of the external avenues for raising capital that is available to companies. Debt Finance normally entails an agreement
…show more content…
It may require additional working capital (operating expenditure) to solve cash flow challenges; it may require the additional capital for a particular acquisition (capital expenditure) or it may require a one-off borrowing to avert a looming financial crisis .
The purpose of the debt will have a big influence on the type of facility that the company deems viable, and the terms upon which the facility is granted. We will discuss these considerations shortly.
CORPORATE FINANCE: DEBT VERSUS EQUITY FINANCING
In choosing between internal sources or external sources of capital, the directors of a company are obligated to act in the way in which the directors consider (in good faith) would promote the success of the company for the benefit of its members. Some of the likely considerations around debt are:
Advantages of Debt Compared to Equity Disadvantages of Debt Compared to Equity
• Debt does not dilute shareholders’ ownership interest in the company because the lender does not have a claim to equity in the business
• A lender is entitled only to repayment of the agreed-upon principal of the loan plus interest, and has no claims on
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
I would say that the source would be through investors, or using assets to borrow the money.
Costco Wholesale Corporation was an uncommon type of retailers called wholesale clubs. These clubs differentiated themselves from other retailer by requiring annual membership purchase. Especially in case of Costco, their target market is wealthier clientele of small business owners and middle class shoppers. They are now known as a low cost or discount retailer where they sell products in bulk with limited brands and their own brand. The company is competing with stores like Wal-Mart, SAM’s, BJ’s, and Sears. The case begins with an individual shareholder, Margarita Torres, who first purchased shares in 1997 and who is trying to evaluate the operational performance of the business in order to make a decision rather or not purchase more shares
In order to achieve its goal, the managers of Marriott have developed a financial strategy with 4 main decisions.
The consistent high spending of capital equipment is the first reason why one would recommend reducing the debt to equity ratio. A company with higher levels of debt is less flexible in being able to adjust to new market demands and conditions that require the company to make new products or respond to competition. Looking at the pecking order of financing, issuing new shares to fund capital investing is the last resort and a company that has high levels of debt, must move to the equity side to avoid the risk of bankruptcy. Defaulting on loans occur when increased costs or bad economic conditions lead the firm to have lower net income than the payments on loans. The risk of defaulting on loans and the direct and indirect cost related to defaulting lead firms to prefer lower levels of debt. The financial distress caused by additional leverage can lead to lower cash flows available to all investors, lower than if the firm was financed by equity only. Additionally, the high debt ratio that Du Pont incurred also led to them dropping from a AAA bond rating to a AA bond Rating. Although the likelihood of not being able to acquire loans would be minimal, there are increased interest costs with having a lower bond rating. The lower bond rating signals to investors that the firm is more likely to default than if it had a higher (AAA) bond rating.
Myers, S.C. 2001, "Capital Structure", The Journal of Economic Perspectives, vol. 15, no. 2, pp. 81-102.
There’s a lot more to being in debt aside from the fact that you owe more than you currently own. In addition to having balances that you need to pay, you also have to deal with calls from collectors or reminders that the bill is overdue — every single day. This alone is enough of a nuisance to make one want to run away from the debt and forget about it. Fortunately, there are ways to solve the problem of debt. One of these is debt settlement.
Cindy would often come to work with bags around her eyes. Her colleagues were constantly asking her if things were alright at home and if she was okay. Cindy did not want to be sick anymore. She was also tired of being asked questions about her personal life. Cindy had several sleepless nights, and the effects of that showed on her face.
Lendlease is a leading international property and infrastructure group, with a business model that contains three basic components. Those three components are development, construction and investments. In development, they focus on developing communities, apartments, retail areas and social/economic infrastructure. In construction, they focus on defense, commercial, residential sectors and pharmaceutical buildings. In investing, the investment management platform also includes the Group’s ownership interest in property and infrastructure co-investments, retirement living and US military housing. Lendlease is an Australian company but has business headquarters in 4 regions of the world. These regions are Australia, Asia, Europe
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Equity capital represents money put up and owned by shareholders. This money can be used to fund projects and other opportunities under the auspice of creating greater value. This type of capital is typically the most expensive. In order to attract investors, the firms expected returns must consummate with the associated risk ("Financial leverage and,"). To illustrate this, consider a speculative oil drilling operation, this type of operation would require higher promised returns than say a Wal-Mart in order to attract investors. The two primary forms of equity capital are 1) money invested into the business for an ownership stake (i.e. stock) and 2) retained earnings from past profits used to fund future growth through acquisitions, expansions and product development.
A question for the class, what do you think of Debt Ratios is a good test for Real Estate. We are by nature in an industry that always have large amount of debt. What do you think?
The lifestyle of people across the world is developing rapidly. As there is a growing concern for people about the lifestyle and way of living, the scope for the microfinance industry is also at a growing pace. A large number of people across the world prefer finance for the purpose of purchase of consumer durables as well as lifestyle products. As the credit card EMI options are more expensive, people prefer NBFCs for the purpose of consumer durable loans. The project done in bajaj finserv explains the role of NBFCs in the consumer durable loans and the procedure undertaken in order to disburse the consumer durable loans.
· Where the business is in terms of its development. · Whether it is a profitable business. Define the following terms in your own words · Internal Finance Internal Finance can be profit that has been retained, squeezed out of working capital, or can be cash from sale of assets. This is money that was already within the business. · External Finance External Finance for day-to-day working capital is trade credit, bank overdrafts, and debt factoring.
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.