Question

Analyze various funding alternatives that can be used to support obligations

Answer 1

Obligation means payments to bond holders, loans, suppliers, and other short term debt.
In a company the alternatives to support obligations:
1. Retained Earnings:
Company can decrease the dividend pay-out ratio to 0 and retain the entire earnings which can be used to meet financial obligations. This is the best method as it does not involve flotation cost.

2. Working capital management:
By negotiating with supplier in such a way that the average account payable days increase and also negotiating with debtors so that account receivable days decrease. This will ensure cash with the company which can be used to pay off short term obligations.

3. Issue of Shares: Though issuing shares need underwriter fees, flotation cost, etc. it is one of the best ways to generate cash from financing activity. This money can be used to meet financial obligations. Dividend payment by company is not mandatory and they may or may not pay dividend based on the financial health of the company.

4. Leasing in place of Capital Expenditure: Leasing can be a method instead of outright payment on machinery. Leasing is periodic payment and provide tax benefits which will help in meeting financial obligations better.

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