Business Financing and the Capital Structure
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Business Financing and the Capital Structure INSTRUCTIONS:
Business have to make financial decisions that have a direct impact on operations and the ability to successfully compete in the marketplace. 1. Assume that you are a financial advisor to a business. describe the advice that you would give to the client for raising business capital using both debt and equity options in today`s economy. Outline the major advantages and disadvantages of each option. 2. Summarize the advice that you would give the client on selecting an investment banker to assist the business in raising captial. 3. Explain the historical relationships between risk and return for common stocks versus corporate bonds. Explain the manner in which diversification helps in risk reduction in a portfolio. Support response with actual data and concepts.
CONTENT:
Business FinancingNameCourseInstructorDate Equity financing and Debt financingThe choice of equity financing enables businesses to share risks with investors, and this option is particularly necessary for businesses that need to generate more cash flows as there is no need for debt payments unlike debt financing. Furthermore, since investors have a direct stake in a business they are likely to offer their assistance. In essence, the business gets access to cash on hand, and since investors have a long-term view about the business, they do not expect immediate returns to their investments. Nonetheless, equity finance also has drawbacks for the business, as investors become owners, whereby decision making becomes more collaborative. Investors share business profits and since there is loss of control in the business, making decisions might take time and effort (Walter, 2003). In any case, as investors gain more control of the business they may want to have their representatives in the top decision making organs of the business. At other times profit distribution exceeds what the business would repay for a loan. The debt financing option ought to be chosen where there is a need for total control of the business. Thus, the main benefit is that there ...
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