Finance for non finance managers Assignment Example | Topics and Well Written Essays - 1500 words

Finance for non finance managers - Assignment Example 40 million from the debt market. Using debt to run the business has both advantages and disadvantages. Advantages Debt is a low cost capital. Using debt the company does not have to pay tax on it. Hence the company will have to pay less tax overall. Using debt the Earning per share of the company fluctuates more than using only equity as the source of capital. Hence during good times the Earning per share of the company will rise much higher than when the company use only equity (Tuller, 2007, p. 211). This satisfies the shareholders as they will get more in return. Hence they will always want some portion of the capital to be raised as debt. Again using debt the company don’t have to share the ownership rights with the shareholders. They don’t have to go back to the shareholders each time they need to take an important decision. All they want is to get fixed return on the investment that they have made. Again the lenders don’t have any claim on the future earnin gs. Furthermore if a debt can be paid on time, then the credit rating of the business will improve and they will readily get finance easily from the market next time they went to any financial institutions for loan. Disadvantages The company has to make regular monthly payment of instalment and interest. Barnet Solutions is going to expand in the European market for the first time. ... 176). Hence it is like a double edged sword. If the economy in the European market deteriorates the Earning per share of the company will fall down drastically. The shareholder then may ask tough questions to the management regarding their decision making process. Pure Equity The company can use Equity as the source of fund. Advantages Using Equity the company can avoid the hassle of going through the long process of applying for loan. It takes more time to raise debt than equity. It is less risky than a loan because the company will not have to pay back the obligation if they cannot afford it. The company can easily tap into its investors’ network and add more credibility to the business. The investors here takes a long term view and don’t expect and immediate return. The company also don’t need to payback if the business fails (Mason, 2010, p. 212). Disadvantages The investors can demand returns more than the interest rate the company will have to pay for debt. The investors also will require ownership of the company. They have to be consulted before making any big decision. It also takes time and effort to find the right investors for the company. Period 2012 2011 D/E 1.18 0.92 The standard Debt-equity ratio of any company is 2:1. Hence it is advisable for the company to raise fund through both debt and equity. The company can go 80:20 ratio of raising the money from the market with the majority being debt and other being equity. Hence the company can raise ? 32 million from the debt market and ? 8 million from the equity market. After using the above capital the debt equity ratio will become Period 2012 2011 D/E 1.28 1.04 This shows that the company will be well within the standards limits of the Debt-Equity ratio. Answer 2 The