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Financial Decision Making - Essay Example

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Summary to essay on topic "Financial Decision Making Essay"
a. Beta's acquisition of equipment for its operations can be financed by short-term loans, long-term liabilities, or shareholders' equity. Short-term loans are often easier to secure than the other types of financing. However, Beta is tied to paying up these loans within the year…
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Financial Decision Making Essay
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Download file "Financial Decision Making Essay" to see previous pages... This will match the cash inflow to the organization as a result of the acquisition. However, long-term liability requires the payment of interest in pre-agreed periods which requires Beta to have enough liquidity to cover immediate payment of interest when it become due. Capital from shareholders can also be considered.
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This is advantageous since Beta will not be required to pay any dividends. However, issuing new shares require the company to undergo certain processes which can delay acquisition.
After analyzing the advantages and disadvantages of utilizing different financing schemes, it is recommended that Beta raises fund through long-term debt. This is in consideration of the above discussion in addition to the fact that it already has a quite high level of funds from shareholders.
b. An organization's trading profit and loss account shows the revenues or funds generated the entity compared to the costs and expenses incurred in its operation. In most companies, it starts with the revenue generated where the expenses are subtracted. The last line shows its net profit for the fiscal period or for listed ones, the return to its stockholders. This financial statement is often the most popular one as it is used by creditors, stockholders, and even ordinary consumers. Entities considering to provide financing for the company also often gauged profitability and ability to pay based on profit and loss account.
The balance sheet shows an entity's resources and how they are financed. The organization's assets and liabilities are often listed based on their liquidity, that is, on their capacity to be converted to cash easily. Balance sheets are often scrutinized by creditors and stockholders, the major sources of financing for the company. Balance sheets provide information about the company's level of leverage which informs stockholders and creditors about their share in the company's resources and the riskiness of investing in the company.
c. Table 1 shows the computed financial ratios of the three business organizations in consideration:

Beta is superior in terms of profitability as it consistently shows the highest ratios except return on equity. However, looking at the balance sheet, the high ROE of Alpha is due to its low level of shares from stockholders. Gamma is most efficient as it also highlights the highest efficiency ratios emphasizing its ability to maximize its resources. Beta is the most liquid having current assets which can more doubly pay-off its immediate liabilities.
d. The use of financial information is very much essential for the three business organizations' decision making. As making the most appropriate decision is often to the company's success and even mere survival, it should make use of all the resources at its disposal. Financial information are often the most readily available source of information where the company can assess its strengths and weaknesses. Through the use of financial ratio analysis, a company can makes comparisons about its performance and other business organizations in the industry. As ratios are grouped according to the area that they asses, it can also show the company's flaws and strengths. It can also diagnose its weaknesses and monitor its performance ...Download file "Financial Decision Making Essay" to see next pagesRead More
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