Long-term debt finance, Financial Management

Assignment Help:

The approaches that Blin could accept regarding the relative proportions of long- and short-term finance to meet its working capital needs have been described as moderate, conservative and aggressive.

The assets of a business is able to be divided into current assets and fixed assets where current assets are used up on a regular basis within a single accounting period and fixed assets benefit a business for several accounting periods. Current assets are able to be further divided into permanent current assets and fluctuating current assets. Permanent current assets correspond to the core level of investment in current assets needed for a given level of business activity and occur from the need for businesses to carry inventory and to extend credit. Intermittent current assets represent a variable need for investment in current assets arising from either seasonal or unpredictable variations in business activity.

A conservative approach to the financing mix would accentuate long-term finance as the main source of working capital funds. This approach would utilize long-term finance for permanent current assets, fixed assets and some fluctuating current assets.

Long-term debt finance is fewer risky to a company than short-term debt finance since once in place it isn't subjected to the dangers of renewal or immediate repayment but is more expensive in that the rate of interest charged normally raise with maturity. A conservative approach would consequently increase the amount of lower-risk long-term debt finance used by the company but would as well incur higher total interest payments than an approach emphasizing the use of short-term debt and so would lead to relatively lower profitability. A similar argument is able to be made with reference to equity finance which requires a higher return than long-term debt finance.

An aggressive approach to the financing merge would emphasize short-term finance as the main source of working capital funds. This approach which is at present being used by Blin uses short-term finance for fluctuating current assets and some permanent current assets with long-term finance being used for the balance of permanent current assets and fixed assets.

This raise the relative amount of higher-risk short-term finance used by the company but will as well incur lower total interest payments than the conservative approach discussed above leading to relatively higher profitability.

Among these two approaches lies a moderate or matching approach. This approach relates the matching principle whereby the maturity of the funding is matched with life of the assets financed. Here long-term finance is utilized for permanent current assets and fixed assets while short-term finance is used for fluctuating current assets.

The repayment of the overdraft wills consequence in Blin adopting a conservative approach to the mix of long- and short-term finance. This will determine an overtrading situation if it exists but may reduce profitability more than necessary. If Blin keeps on expanding sales or reintroduces overdraft finance the conservative position will only be temporary and a moderate position may arise in the future. The speed with which this occurs will depend on the size of the loan taken out and whether a moderate position is desirable will depend on the company's attitude to risk and return. It may be preferable to decrease the overdraft to a lower level relatively than repaying it completely. A clearer picture would appear if we knew the intended use for and the amount of the balance of the loan not being used to repay the overdraft.


Related Discussions:- Long-term debt finance

Caselet, 1.How would you judge the potential profit of Bajaj Electronics on...

1.How would you judge the potential profit of Bajaj Electronics on the first year of sales to Booth Plastics and give your views to increase the profit? 2. Suggestion regarding C

Just-in-time inventory management, Q. Just-in-time inventory management? ...

Q. Just-in-time inventory management? It considerably improves the short-term liquidity of the business with a maximum financing requirement of $138533 rather than $155640. The

Companies accuse investors of performing credit sales, At times, companies ...

At times, companies accuse investors of performing credit sales that they make their quotations fall. Is that true? It is true: there are companies that accuse investors who pe

price of the bond be if it is downgraded, Andrew Industries is contemplati...

Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from

Pull strategy, Pull Strategy Pull strategy define a marketing appr...

Pull Strategy Pull strategy define a marketing approach in which a manufacturer promotes a product directly to consumers in the hopes that the consumers will then request

Determine what is current ratio - position ratios, Determine Current ratio...

Determine Current ratio  or working capital ratio CA = Current assets/Current liabilities (times) Current ratio measures the short term solvency or liquidity; it demonstra

Abnormal earnings valuation model, Abnormal Earnings Valuation Model Ab...

Abnormal Earnings Valuation Model Abnormal Earnings Valuation Model is a method to analyse the value of the firm. The value of the firm can be the sum of three components - the

Explain the cash and cash equivalents, Explain the Cash and cash equivalent...

Explain the Cash and cash equivalents Cash and cash equivalents include: Bank and cash balances Short term investments that are highly liquid and can be converted

Examine the examples of political risk within countries, Examine the Exampl...

Examine the Examples of political risk within countries Outbreak of national war, unrest, civil war or riot. Nationalisation of industriesfor example confiscation of as

Determine the term- profit before taxation and interest, Determine the term...

Determine the term- Profit before taxation and interest Profit before taxation and interest can also be used here in addition to profit for the period. Whichever figure is tak

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd