Analyze financing options to maximize investor value
Scenario
The CFO of your company has asked for your support in preparing a report for the business’s board of directors. Many of the board members are new, and some of them have little background in finance. With this in mind, you will need to write a report that all board members can easily understand.
Directions
Specifically, you must address the following rubric criteria:
Financial Analysis: In prior assignments, you calculated some of the financial formulas using quarterly financial statements from your chosen business and the Final Project Financial Formulas worksheet. For the financial analysis, edit prior work based on feedback and include it in this final project.
Financial Calculations: Accurately calculate financial formulas to figure out the business’s current financial health. You must calculate the following:
Working capital
Current ratio
Debt ratio
Earnings per share
Price and earnings ratio
Total asset turnover ratio
Financial leverage
Net profit margin
Return on assets
Return on equity
Working Capital Management: Explain the impact of working capital management on a typical business’s operations. Provide examples to support your claims.
Why is it important for a business in general to carefully manage its working capital?
Financing: Explain the options available for a company in general to finance its operations and expansion.
Short-Term Financing: Explain how potential short-term financing sources could help any business raise funds for improving its financial health.
Bond Investment: Discuss the risks and benefits of any business investing in a corporate bond. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis.
Capital Equipment: Discuss the risks and benefits of any business investing in capital equipment. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis.
Building: Discuss the risks and benefits of any business investing in a building, including leasing substantive physical assets like buildings. Include the necessary ethical factors, appropriate calculations, and examples to support your analysis.
Sample Answer
To effectively analyze financing options to maximize investor value, it is essential to first understand the company's current financial health. Below is a breakdown of key financial calculations, followed by an analysis of financing options and their implications.
Financial Analysis
Financial Calculations
Working Capital: The working capital of a business is the difference between its current assets and current liabilities. A positive value indicates that the company has enough short-term assets to cover its short-term debts.
Working Capital = Current Assets - Current Liabilities
Current Ratio: This is a liquidity ratio that measures a company's ability to pay short-term obligations. A ratio above 1.0 is generally considered healthy.
Current Ratio = Current Assets / Current Liabilities
Working capital management is the strategy of managing a company's current assets and liabilities to ensure it has enough cash flow to meet its short-term obligations and operational expenses. It's crucial because it directly impacts a business's liquidity and financial health. For example, a business with poor working capital management might have a high inventory that ties up cash, making it difficult to pay suppliers on time. This could damage its reputation and lead to supply chain issues. Proper management ensures a business can meet its short-term obligations, fund its daily operations, and remain solvent.
Financing Options
A company has several options to finance its operations and expansion, which can be broadly categorized into short-term and long-term sources.
Short-Term Financing
Short-term financing sources help a business raise funds to improve its financial health by providing quick access to capital for immediate needs. These can include:
Trade Credit: A company can negotiate with its suppliers to delay payments, essentially getting a short-term loan.
Bank Loans: Businesses can obtain lines of credit or short-term loans from banks to cover temporary cash flow gaps.
Commercial Paper: Large, creditworthy companies can issue unsecured promissory notes to raise funds from the public.
Bond Investment
Corporate bonds are debt securities issued by a company to raise capital.
Benefits: For the investor, corporate b