Question

Questions

1. What are the principal considerations in determining an overall credit policy? How do the actions of competitors affect a firm's credit policy?

3. 2. Why do exchange rates pose a challenge for financial managers of companies with international operations?

4. 3. What are the advantages and disadvantages of both debt and equity financing?

5. 4. Compare and contrast the three sources of short-term financing.

6. 5. Define venture capitalist, private equity fund, sovereign wealth fund, and hedge fund. Which of these four sources of funds invests the most money in start-up companies?

Answer 1

1. principles considarations in determining overall credit policy

1. Purpose of the policy
2. Objectives
3. Credit limit authority
4. Credit evaluation
5. Credit limits
6. Terms
7. Account Review
8. Collections

the actions of competitors affect the overall credit policy , because the competitor makes a good credit policy , as per their situations and it also the same situations the every firm which operates the market , so the actions that the competiitor makes affect the other firms . some times it become positively effected or some times negatively , it was reflected as the the actions which made by the competitors.

2. foreign exchange risk is the possibilty of a gain or loss to a firm that occurs due to unanticipated changes in exchange rates. for example if an indian firm import goods and pay in foreign currency ( dollers ) , its outflow is in dollers , it is exposed to foreign exchange risk. if the value of foreign currency rises the indian firm has to pay more domestic currency to get required amount of foreign curency, so in this it is a challenge for financial mangers in international operations.

3.debt is the borrowed money which is repaid plus interest and equity is rising money by selling interest in the company.

advantages Debt copared to Equity:

• The lender does not have a claim to equity in the business, debt does not dilute the owner's ownership interest in the company.
• Except in the case of variable rate loans, principal and interest obligations are known amounts which can be forecasted and planned for.
• Interest on the debt can be deducted on the company's tax returns, lowering the actual cost of the loan to the company.
• Raising debt capital is less complicated because the company is not required to comply with state and federal securities laws and regulations.

Disadvantages of Debt compared to Equity:

• Unlike equity, debt must at some point be repaid.
• Interest is a fixed cost which raises the company's break-even point. High interest costs during difficult financial periods can increase the risk of insolvency. Companies that are too highly leveraged often find it difficult to grow because of the high cost of servicing the debt.
• Debt instruments often contain restrictions on the company's activities, preventing management from pursuing alternative financing options and non-core business opportunities.
• The larger a company's debt-equity ratio, the more risky the company is considered by lenders and investors. Accordingly, a business is limited as to the amount of debt it can carry.

4. There are three main sources of short-term funds

1.trade credit (borrowing from suppliers):

Trade credit is the largest single source of short-term funds for businesses, presenting approximately one-third of the current liabilities of nonfinancial corporations. Trade credit (assuming you can get it) is more flexible than other means of short-term financing. The firm does not have to negotiate a loan agreement, pledge collateral, or adhere to a rigid repayment schedule.

2.bank loans:

Bank term loans represent intermediate-term debt. It is a loan for a specified amount that requires the borrower to repay it according to a specified schedule.Commercial bank lending is second to trade credit as a source of short-term financing. Commercial banks also provide intermediate-term financing (maturity between 1 and 10 years).

3. commercial paper (selling short-term debt securities in the open market):

Firms that borrow by pledging receivables, inventories, or marketable securities can borrow more."

5. venture capital is a private equity a form of financing that provided by firms or fund to small , early stage, emerging firms that are deemed to have high gwoth potential and which have demonstrated high growth .

hedge fund is a investment fund that pools capital from accredited individuals or institutional investors and invest in a vareity of assets often with complex portfolio construction and risk management techniques.

sovereign wealth fund is a state owned investment fund that invest in real and financial assets such as stock ,bond, real eststes , precious metals or in alternative investments such as private equity fund or hedge fund. Sovereign wealth funds invest globally.

privarate eqiuty fund is a collective investment fund usedfor making investments in various equity securities . this fund is raised and managed by investment proffesionals of aspecific private equity firm.

venture capital is best for start ups and it provided funds in early stage , small and easily pick up by new ventures.