Developing and Using a Long-Term Financial Plan - Essay Example

The use of leverage can help an organization grow. Debt financing should be monitored closely to ensure that the company’s debt obligations do not adversely affect the cash flow position of the organization. The use of financial metrics such as the current ratio can help managers monitor their debt position. The current ratio can be used to determine whether a company is in a good position to pay off its short-term debt (Besley & Brigham, 2000).
2. What are the implications for a company's Weighted Average Cost of Capital and Minimum Required Free Cash Flow Return on Assets if the company only uses Equity Capital to finance its Total Assets?
The sole use of equity financing affects the weighted average cost of capital composition. A lack of debt implies that 100% of the firm’s financing was achieved through the sale of common and preferred stocks. The free cash flow return on assets of a company is better whenever a company does not have to make monthly payments of principal and interest on the debt.
3. The majority of business owners the Instructor has met do not use any long-term financial planning process for their company. What would you say are the pros and cons of developing and using long-term financial plans for a company?

            Developing and using a long-term financial plan is critical to the success of a company. It is not wise to use equity financing as the sole instrument to raise money because issuing too many common stocks dilutes its value and lowers the power of the owners. One of the advantages of the use of debt financing is that it does not give the lender any power over the operations of the company. A con of debt financing is that it imposes a fixed obligation that adversely affects the cash flow of the company

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