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Financial Decisions

The document discusses the main sources of finance for private and public companies which are equity, debt, and retained earnings. It then explains each type of finance and discusses decisions around debt versus equity financing and issues around liquidity and working capital.

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26 views1 page

Financial Decisions

The document discusses the main sources of finance for private and public companies which are equity, debt, and retained earnings. It then explains each type of finance and discusses decisions around debt versus equity financing and issues around liquidity and working capital.

Uploaded by

lalisst9905
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The most common sources of finance of private and public companies are 3:  Equity  Debt 

Retain Earnings  Equity: Equity is the ordinary shares of a company. Equity is also known as
“Common stocks”, it represent ownership shares in a firm. Each share of common stock entitles its
owners to one vote on any matters of corporate governance put to a vote at the firm’s annual
meeting and to a share in the financial benefits of ownership, such as, the right to any dividends that
the firm may choose to distribute.  Debt: Debt are the money that a company borrow to finance it
projects or activities. Debt are liabilities and obligations of the firm that require a payout of cash
within a stipulated period. Example include loan from bank, issuance of bond and debentures, etc.
Financial Decisions Retain Earnings: This are the part of profit of a company that it chose save in its
reserve for future projects. When a company makes profit, it distributes some to its shareholders as
dividend and retain some as reserves.  Debt versus Equity: This is the decision whether to finance a
growth project with debt or equity of the firm. This is one of the important decision that every firm
goes through. Both debt and equity financing have their advantages and disadvantages. While debts
are liabilities and are frequently associated with fixed cash burdens, called debt service, that put the
firm in default of a contract if they are not paid. Stockholders’ equity is a claim against the firm’s
assets that is residual and not fixed. Generally, when the firm borrows, it gives the debt giver first
claim on the firm’s cash flow. The debt owner can sue the firm if the firm defaults on its debt
contracts. This may lead the firm to declare itself bankrupt. On the other hand, Stockholders’ equity
is the difference between a company’s assets and its liabilities: Equity = assets – Lliabilities. Financial
Decisions The accounting value of stockholders’ equity increases when retained earnings are added.
This occurs when the firm retains part of its earning instead of paying them out as dividends. Value
Versus Cost: The accounting value of a firm’s assets is frequently referred to as “the carrying value”
or “the book value” which is a fancy name for cost of the assets. The cost of firm’s asset is the
original historical price that the asset was purchase. Market value on the other hand, is the price at
which willing buyers and sellers would trade the assets. Accounting principles and standards dictates
that real assets should be recorded and carried at its cost, while Financial assets are normally
recorded at its market value. Liquidity: Liquidity refers to the ease and quickness with which assets
can be converted to cash without significant loss in value. Current assets are the most liquid assets,
they include cash and other assets that will be turned into cash within a year from the balance sheet
date . A company is said to be liquid if it has enough assets that can be quickly converted into cash
for the working capital of the firm. Working capital is the blood of any firm. Thus a firm must decide
the means of financ

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