Question

Accounting 2 - Financial Accounting, Ch. 10: Reporting and Analyzing Liabilities : What factors should management consider in determining if borrowing funds is a viable solution? In acquiring funds to finance major projects, how should management choose from among the alternatives?

Answer 1

1) What factors should management consider in determining if borrowing funds is a viable solution?

Answer: Following factors needs to be considered:

--Reason for borrowing - Why does the business require capital ? Expansion of business in the same vertical or deleveraging to other business? or Is the capital required urgently or a part of promoters equity can be slowly used for expansion eliminating debt need?

--Nature of cash flows, poor cash flows may result insolvency of a company

--Rates of interest to will determine the viability because high interest rates will discourage management borrowing funds

--Impact of borrowing to the business, for example if business is seasonal then the short term borrowing will be viable.

--Growth and expansion of the business also determine the viability of borrowing finances

-- Type of funding such as project term loan or private equity.Both have their advantages and disadvantages

--Debt servicing is available on quarterly mode ?

　

2) In acquiring funds to finance major projects, how should management choose from among the alternatives?

Answer: Choosing an appropriate source of to finance major projects can be a difficult and time-consuming task. The important factors to consider when choosing methods of financing among various alternative that aim at having an optimal capital structure are as follows:

--Repayment Terms: loans with shorter terms can require larger periodic payments wheras the longer loans can build up a significant amount of interest over time . Thus the management need to consider the periodic payment amount and how often you are required to pay

--Interest and Fee Structures: It is important the all costs are added associated with each financing method before making a decision.

--Financing Requirements: Management should pursue financing from sources whose requirements business meet in full. Common financing requirements include credit score requirements and typical financial ratio tests, such as the interest coverage ratios or debt-to-equity.