Financial and Strategic Management - Essay Example

Should a project or an ongoing business use debt or equity finance? What are their pros and cons? If a project uses both equity and debt finance,what is the appropriate mix? The financing of a project can use either debt or equity. The method chosen by the company depends on the capital structure of the firm. Firms that are highly leveraged may not continue to pursue debt financing because they are already paying a lot of interest. One of the cons of debt financing is the payment of interest. A positive aspect of debt financing is that the firm does not relinquish any control (Richards, 2011).

The use of equity financing can be used to raise money fast. One of the advantages of equity financing is that firm is not obligated to pay back the principal and there are no interests costs associated with the acquisition of money through equity financing. A con of the strategy is that the common stocks sold in the open market by public corporations have voting rights which dilutes the power of ownership. There is no single formula to determine the appropriate mix for a particular project. The mix that will be used by a company will depend on a variety of internal and external factors.

For instance when the interest rates in the market are low companies are going to be more persuaded to increase the use of debt to finance projects. 2) Identify 3-5 sources of funding for projects. You may include budget allocations directly from governments or private sources of finance. What are their relative advantages and disadvantages? There are many sources that can be used to finance a project. Five of those sources are common stocks, preferred stocks, bonds, governmental incentives, and retained earnings.

Common stocks are one of the most popular investments in the market. One of the best attributes of common stocks is that they are extremely liquid (Little, 2011). Preferred stocks are another source that can be used. Preferred stocks guarantee its holders a dividend payment that if is not paid it accumulates. Bonds are individual loans of $1000 each that are issued by corporations to be sold to individuals. An advantage of bonds for the corporation is that the principal is paid as a balloon payment once the bond matures.

Governmental incentives such as tax credits can help finance a project by reducing the total cost of the project. 3) What is the meaning of the weighted average COC (cost of capital) in a private business that uses both debt and equity financing? The meaning of the weighted average cost of capital in a private business that uses both debt and equity financing deals with the equation that is used to calculate the balance between debt and equity. For example in a company that has a structure of 60% debt and 40% equity you would take those two weighted factors into consideration to calculate the cost of capital of the company.

All capital sources including common stocks, preferred stocks, and bonds are included in the calculation of the weighted average cost of capital (Investopedia, 2011). 4) Does the NPV methodology offer specific advantages in capital budgeting decisions? The use of the net present value technique to make capital budgeting decisions is very useful. One of the advantages of the net present value method is the use of time value of money (12manage, 2011). The time value of money is very advantageous because it gives the manager an idea of how much money the project will generate taking into consideration inflation.

Money over time devalues as a consequence of inflation. A project should only be accepted if the NPV of the project is above cero. When choosing among many different projects the project that should be accepted is the one with the highest NPV. 5) Do project financial results affect financial health of the entire organization or a department or a private company? Does the reverse hold true too -- in other words, does the financial health of the company or organization affecting project outcome?

The financial well being of a company is correlated with the chances of a project by that company succeeding. For instances if a company is having cash flow problems it could affect the normal operations of an enterprise such as temporary shutdown or layoffs. If a company shuts down because of a lack of cash all work associated with a project will be delayed as a consequence. A project’s result can have positive influences on a department or company. A lot of projects lead to the creation of innovation in a company.

Innovation deals with bringing new products into the market (Princeton). Many corporations have more than one project running at once. The purpose of these projects is to increase the profitability and value of the company. References 12manage.com (2011). Net Present Value (NPV). Retrieved July 25, 2011 from http://www.12manage.com/methods_npv_pt.html Investopedia.com (2011). Weighted Average Cost of Capital (WACC). Retrieved July 25, 2011 from http://www.investopedia.com/terms/w/wacc.asp Little, K. (2011). Introduction to Stocks.

Retrieved July 25, 2011 from http://stocks.about.com/od/understandingstocks/a/Stockintro.htm Princetown.edu. The Nature and Importance of Innovation. Retrieved July 25, 2011 from http://press.princeton.edu/chapters/s9221.pdf Richards, D. (2011). Debt Financing – Pros and Cons. Retrieved July 25, 2011 from http://entrepreneurs.about.com/od/financing/a/debtfinancing.htm