Estimating asset requirement for a corporation
Financial planning is a significant planning process in a business is an integrated process that entails planning for investment in new assets, degree of financial leverage, cash paid to shareholders, liquidity requirement. The planning process for estimating the asset requirements goes through some distinct steps. The management needs to determine the amount of capital that is required for the asset requirements. Estimate the requirement for fixed assets, intangible assets, current assets, and cost of setting up the asset.
The first step of the planning process is projection of financial statements especially the income statement and statement of the financial statements. The second step is estimating the availability of funds. The fourth step is coming up with control systems. The final step in financial planning is developing procedures (Helfert, 2007).
Working capital management refers to application of financial concepts to ensure that short term assets and liabilities are effectively and efficiently managed. Some of the balance sheet items that are commonly used in the calculation of working capital are accounts receivables, accounts payable, inventory, and short term debt among others. Proper working capital management is important to ensure that a company does not tie excessive cash flows in working capital.
Further, it enables management to ensure that sufficient cash flows are maintained. The company is currently facing numerous problems in managing its working capital and more specifically in the management of cash and inventories. There is need to consider the various best practice management of working capital.
Under working capital management, some of the items that need to be controlled are management of cash, management of stock, management of investment, and management of debtors. Thus, there is the need to maintain an optimal level of liquidity to ensure smooth running of the business (Bierman, 2010).
When the management of a business realizes that they hold excess cash, they often invest such excess cash in liquid marketable securities. The marketable securities can either be equity or debt instruments that provide a return on the investments. Further, they can easily be converted to cash and are thus considered a current asset.
There is a well-built market for such securities. Some of the marketable securities that are used by businesses to keep excess cash are treasury bills and bonds, broadly traded corporate bonds for blue chip companies, commercial papers, Repos, money market mutual funds and negotiable CDs among others (Bierman, 2010).
Advice on debt and equity financing
Analyzing the capital structure of a company is of utmost importance because it determines the rate at which a company grows. Further, it also dictates the amount of working capital that is available for the company. The capital structure shows the amount of various ways of funding that the company uses. The management of the company needs to maintain an optimal mix of various sources of funds because the mix has an impact on the profitability, cash flows and amount attributed to shareholders.
Risks and rewards for using a foreign investor
In the recent past, more companies have opted to seek capital from foreign market. They achieve this by listing their companies in the foreign exchange markets. The exercise is quite expensive. This arises from the differences in accounting procedures being used by different countries and different currencies.
Besides, such businesses that seeks capital from external sources needs to comply with various regulatory requirements. Despite the challenges, use of foreign investors enables the company to raise a large amount of capital from diverse investors across the world. Besides, it gives an investor the opportunity to venture into new markets across the world (Collier, 2009).
Risk and return for common stock versus corporate bonds
Determination of optimal capital structure is a vital decision on financing options to use. Optimal level of debt is the level at which the cost of capital is minimized. It is the level beyond which a firm should not borrow. Further, as debt increases, equity becomes riskier and the cost of equity will definitely increase. The optimal debt ratio depends on a number of factors. These are the tax rate, the pre – tax returns on firm, variances in earnings and default spread.
Use of corporate bonds is cheap and it reduces the weighted average cost of capital. However, increasing the amount of corporate bond increases the amount of weighted average cost of capital as gearing, financial risk, and beta equity goes up. If the objective of the company is to maximize shareholders’ wealth, then the company must reduce the amount of corporate bonds thus reducing beta equity. Common equity is a significant component of the capital structure.
Common equity is expensive in the long run and less risky in the long run. However, the amount corporate bonds in the capital structure have an impact on the cost of equity. High amount of debt increases risk of equity thus increasing the risk premium that shareholders will require for their investment (Bierman, 2010).
Bierman, H. (2010). An introduction to accounting and managerial finance. Boston: World Scientific Publishing.
Collier, P. (2009). Accounting for managers. London: John Wiley & Sons Ltd.
Helfert, E. (2007). Financial analysis tools and techniques: a guide for managers. New York: McGraw-Hill Publishers.