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Managing Financial Resources and Decisions - Essay Example

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It has been estimated that the total investment required for the above project is £ 250 million. 50 % of this investment (£ 125 million) goes into the new machinery,…
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Managing Financial Resources and Decisions

Download file to see previous pages... These sources can be broadly classified into short term and long term sources of finance. Long term sources of finance, as the name indicates, are required over longer periods of time (any duration that is above 1 year) whereas short term source of finance that are required within a period of one year. There are three main long term sources of finance for JS and co, namely, share capital, debentures and long term loans.
An equity share represents a share of the company’s assets and a share of earnings after the claims are met. Equity shareholders are the owners of the business and have a right in the company for the percentage of shares owned by them (Samuels et al, 2000). Also, the risk is borne by the shareholders who invest in the company. JS and co can issue new shares in order to raise some surplus finance.
Debentures are bonds issued to the investors in exchange for finance lent to the company. JS and co can borrow money in the form of debentures from the public, by agreeing to repay the sum by some future date. Also, Js and co has to pay an interest to the creditors (debenture bond holders) before paying out dividends to the shareholders. Hence, in this case, debentures have a little risk attached to them compared to the shareholders, from the company’s perspective (Samuels et al, 2000).
Long term loans from banks and other sources are the easiest ways to raise a large amount of capital. Obtaining higher amounts of long term loans will be easier for JS and co, as the business is well established and is making profits. However, the interest payable might be high (as it is spread over a long period of time). Hence a high interest cover should be available for the company, in order to ensure interest payments in times of a financial crisis. Increasing the long term liabilities will increase the gearing ratio (Burke and Wilks, 2007). This coupled with sustaining a high interest cover ...Download file to see next pagesRead More
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