Financial Planning & Risk
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1. Explain the process of financial planning used to estimate asset investment requirements for a corporation. Explain the concept of working capital management. Identify and briefly describe several financial instruments that are used as marketable securities to park excess cash.
2. Assume that you are financial adviser to a business. Describe the advice that you would give to the client for raising business capital using both debt and equity options in today's economy.
3. Explain why a business may decide to seek capital from a foreign investor indicating the risk and rewards for such a decision. Provide support for rationale.
4. Explain the historical relationships between risk and return for common stocks versus corporate bonds. Explain how diversification helps in risk reduction in a portfolio.
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The solution discusses financial planning and risk.
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Answer 1:
The following are the key steps of the financial planning process to estimate asset investment requirements.
- Forecast sales for next financial years
- Determine total asset turnover ratio
- Identify amount of assets necessary to support new sales level by using percent-of-sales method (Melicher & Norton, 2011).
Working capital management is an important factor of a firm's overall financial management that involves management and control of current assets like cash, marketable securities, receivables etc. It also plays a key role to satisfy financing needs of these current assets in order to maintain an appropriate level of cash and inventory in the business (Sagner, 2010).
The following financial instruments are commonly used as marketable securities to invest surplus cash in:
- Negotiable CDs: These are certificates of deposit that are issued by banks for a specified time period with a fixed rate of interest (Burton & Brown, 2009).
- Commercial Paper: It is a short-term financial instrument that corporations and banks issue to finance their credit needs. An organization can also use this as marketable security to invest its excess case for earnings fixed return.
- U.S. Treasury Bills (T-bills): It is another financial instrument issued by the U.S. federal government with one month, three months and six months maturity period (Golin & Delhaise, 2013).
Answer 2:
Advise for Raising Business Capital
There are two options such as debt and equity that firm can use to raise capital for business. Both these ...
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