-
Impact of different financial resources on the company’s financial statement
Financial statements can have a extreme influence in the stock price of a firm. Investors examine the financial statements as making decision of investment. Information of financial statement is presenting which is better or worse than anticipated, it will send the stock price raising or lowering. Evaluating a firm’s financial health and situations, we can understand the financial statements to make assumptions, which are included Income Statement, Financial Position Statement, Cash flow Statement, and Change in Equity Statement.
Equity Financing
In respect of the statement of Financial Position, the equity fund from the shareholders will increase the money in the firm whereas the share capital will also increase. Increase in the share capital may dilute the gearing of the firm and the control of some of the shareholders if the additional share capital is issued disproportionally.
Following the increase in the equity fund, the risk of the firm may increase as the new equity fund will push up the average expected rate of return when the subscribers will anticipate for greater return on their investment funds.
In respect of Comprehensive Income Statement, the additional share capital does not cause the firm additional expenses and therefore it will not cause a substantial impact on the income, expenses and profits. Nevertheless the investors including new investors will expect the firm perform much better than previous years so that the firm could generate greater distributable profits.
On statement of Changes in Equity, if the company wants to expand the cash on the investment from loan of bank, it will not influence to equity and the liabilities will be increased.
Debt Financing
On Statement of Financial Position,
Discussion on the available of collateral and Gearing ?
Discussion on the impact on the voting right of shareholders ?
On Comprehensive Income Statement,
Discussion on the interest expenses and taxation effect.?
Sources of fund recommendation (1.3)
In the scenario, Betty will prepare to listed company that we need to understand the relating situations.
Equity
Equity financing has no fixed term of repayment that it does not increase the burden on repayment of the investments and no collateral is required. Also, no dividends will be paid if the firm does not derive profits. Furthermore dividends do not attract any tax benefit.
However in the side of investors, if they are not happy with the performance of the existing management they will exercise their power to dismiss them in particular they do not perform well at least what they have promised at the time the investors are encouraged to invest. Hence normally the firm will take steps with a view to achieving the prescribed return to please the investors notwithstanding the expected rate of return is usually greater than interest rates. In consequence, the average rate of return of the firm is greater if additional equity fund is raised. Thus it will be hard for the management to ask the investors for fund in future.
Unless the additional equity is issued in proportion to the shareholding of existing shareholders, otherwise the control power of the shareholders will be varied as a result of the issue of additional share capital. The interests and voting right of some of the shareholders will be diluted.
Hence it may not be good to the firm wholly rely on equity for financing.
Debt
Discussion in the following aspects ?
1) risk : gearing, expected rate of return, priority in distribution of asset in the course of winding up
2) cost : interest expenses and cost effect
3) availability of collateral
4) availability of debt market
Recommendation ?
Please use 50% Equity and Debt to answer
| Subject | Business | Pages | 6 | Style | APA |
|---|
Answer
Financial Management Btec
a). Statement of Financial Position
Debt Financing
Debt financing is the amount that is borrowed by a company as a loan and which is later repaid back together with some interest. Most companies require debt financing to finance some business operations and in the acquisition of assets. Debt financing allows shareholders to maintain complete control of their business or ownership and it has no impact on the shareholders voting rights. Debt financing costs is always lower than equity financing costs.
Debt financing maybe a burden to a company as the principal amounts borrowed must be repaid together with interest and collateral must be pledged as a security for repayments. Debts require more assets as collateral as the lenders have no intentions of becoming part of the shareholders.
The increase in a company’s share capital dilutes the gearing of a company and may also reduce the control of shareholders if issued disproportionally but debt financing ends up in the statement of financial position as liability. Equity capital is also referred to as risk capital as the investors bear the risk of losing their investments if the firm fails.
b). Comprehensive Income Statement
Interest expenses may be increased if debt financing is increased. Interest payments are tax allowable hence makes debt financing to be preferable than equity financing as dividends that are payable on equities are not deductible or tax allowable.
c). Debt
1). Debt financing maybe a burden to a company as the principal amounts borrowed must be repaid together with interest and collateral must be pledged as a guarantee or security for payments (The article provided, n, d).
Debt financing is sometimes considered to have greater risks and attract higher interest rates due to risk-return trade-off. Concerning the gearing in organizations it should be noted that companies cannot operate efficiently solely on equity or debt as equity financing may be required in cases of emergencies while debt financing is equally important in obtaining funds for development, growth and expansion.
Debt financiers have more advantages when companies wind up as they are entitled to be paid before equity shareholders.
2). Interest payments are tax allowable hence makes debt financing to be preferable than equity financing as dividends that are payable on equities are not deductible or tax allowable.
3). Availability of collateral is essential when obtaining debt financing. It can be fixed or floating. Debt financing is considered risky and collateral is essential unlike equity financing that requires no collateral.
4). The debt market that is made up of lenders is more wider than equity capital. Banks and other financial institutions facilitate funding in different ways for example through loans, financial instruments and issuing bonds. Debt capital is however cheaper compared to equity capital as debt capital attracts tax shields that are only available for debt financing and not for dividends (UsheProduction, n, d).
To conclude a firm must ensure that a company’s gearing ratio is adequate and can support the company against losses and other business risks. It is recommended that a firm should have equal amount of debt compared to its equity capital so that it can operate freely and with less risks in terms of debt and equity financing. Due to the higher risks that are associated with equity financing especially to small firms that investors demand greater interest rates for lenders.
References
|
The article provided (n, d) Impact of different financial resources on the company’s financial statement UsheProduction (n, d) Sources of financing: Debt and Equity retrieved September 4, 2017 from http://www.usheproduction.com/design/8020/downloads/4a.pdf |