Question

Discuss in detail the options a firm will have if they don’t have external funding needs.

Answer 1

IF there is no external funding needs , the funds can be used to

i)To pay off current liabilites: a company can pay off its suppliers , paying of suppliers , they can get early discounts plus their current ratio imporves.plus paying off suppliers early will increase the trust of suppliers to the firm

ii)reduce long term debt:paying off bank notes , long term notes will increase the valuations of the firm as debt equity ratio increase.this helps in long run as bankers , analysts look at debt ratios thus debt equity ratio becomes key.

iii)buy back of common stock:buyback helps a comapny to reduce its excessive share capital that is not required for the time being. it helps the company to utilise its large sum of free cash.it helps the company to improve its book value , earning per hare , P/E ratio & ROE.Buyback is relatively a quick method for reduction of share capital.it involves lowe cost transaction.

iv)Paying dividends: similar to buyback a company can pay off dividends with its surplus cash. small term investors look for such dividend paying comapnies for investing. so this puts a positive impression in the market

If you want you can elaborate on any point