Questions . What are the different kinds or types of financing that this company
ID: 1129611 • Letter: Q
Question
Questions . What are the different kinds or types of financing that this company has used to raise funds? What are the weights of debt and equity? 2. What is the cost of debt, cost of equity and cost of capital for the firm? . How large, in qualitative or quantitative terms, are the advantages to this company from using debt? How large, in qualitative or quantitative terms, are the disadvantages to this company from using debt? From the qualitative trade off, does this firm look like it has too much or too little debt? . Does your firm have too much or too little debt relative to its sector and relative to the market? s. If your firm's actual debt ratio is different from its "recommended" debt ratio, how should they get from the actual to the optimal? In particular, should they do it gradually over time or should they do it right now? should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity? and What type of financing should this firm use? In particular, should be short term or long term? what currency should it be in? and what special features should the financing have?Explanation / Answer
Answer 1- Finance for companies is what blood is to body. It is an essence of business and there are different methods to finance business activities -
Weights of debt and equity refers to the weightage of equity and debt capital as to the total capital of the firm. It can be calculated by dividing the debt by the total capital and same for equity.
Answer 2 - Cost of debt refers to the interest that the company pays to it's debenture holders for providing money to the company and cost of equity refers to thee rate of return the company gives to it's equity shareholders. The formula for cost of debt is Interest rate into one minus tax rate whole upon the net proceeds. While for equity shareholders it is Dividend upon market price plus the growth rate. So, the cost of capital becomes cost of debt into weightage of debt to total capital plus cost of equity into weightage of equity to total capital.
Answer 3- There are some advantages of using debt which are called trading on equity. When company uses larger portion of debt in the total capital then it reduces the taxable income and thus helps in tax savings. It also helps in maintaining ownership as otherwise in case of equity shareholders. While some disadvantages are as follows the company is obliged to pay the interest rate and the pricipal amount. Also if any default is made then it affects the credit rating of the company. The advantages and disadvantages cannot be measured appropriately untill the figures are given otherwise it would lead to wrong results. Qualitative trade off means that to get something one must sacrifice something thus to take the advantage of debt financing the company has to give the interest payments to the debtholder's. High debt financing can lead to high interest payment s and can be deterimental to the comany.
Answer 4 - The firm I'm refering to has 15 percent debt in proportion to it's total capital and as it is a small firm the loan is taken from the bank and the interest payments are made on the due date. Also the relative debt share as compared to other companies in the market is quite low as most of the financing done is through self brought capital.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.