1. In determining how to approach running a business, it is important to set out specific targets and compare those to what might be specified at a larger business. My business will look to break even as it is introduced to the market. So a ratio of 1 per cent revenue over expenses (profit margin) would be acceptable in the start of the company. However, larger companies often have a profit margin target of 10 per cent.
2. Debt financing can provide the opportunity to grow at a faster pace than it might otherwise be able. Debt can be a good thing for several various factors. For example, if a person was looking to open a clothing store, but they don’t have enough money to purchase the site, a debt could provide an opportunity for the owner to purchase that site instead of renting it, which wouldn’t allow the business owner to invest into the value of the building in which they are operating. In addition debt financing allows the company to borrow money at a cheaper interest rate. Another advantage to debt financing is the ability of a company to design the business in the way that they want, which might not be affordable to the owners if the company wasn’t able to use debt. Debt may also provide the owner with the start-up capital needed to open the business. Opening a business has many expenses associated with it and start-up capital can help curb those. Of course, there are disadvantages to debt. The more debt that a small business owner takes on, the more risk there is. For example, many small businesses find it hard to keep operating past the first several years. This is because the odds of being profitable are stacked against them. Not only does debt servicing pose an additional expense, it also could be the reason for the business closing. Debt could lead to the forced shutdown of the business if the assets are seized by the lender. This would also cause the company to accumulate a bad credit rating and it would be difficult to receive a loan in the future if the company has failed to meet its obligation to pay creditors in the past. The bonds also allow the company to borrow for a fixed rate for a longer amount of time, (Lee, 1999).
3. Many larger companies decide to go public so that they can raise funds for initiatives like research and development, or surveying or company expansions, for example. The company could also use the capital to pay for equipment and fund a project. This is called equity financing. By issuing stocks over bonds, the company is able to attract investors into the company. This is an easier way to attract investors than to canvass and hope someone wants to invest in the company, (Scott, 2012). However, the interest on bonds and debt other than stocks is that the interest is tax deductible. But the dividends on stocks are not tax deductible for a corporation. Also, bonds don’t dilute the ownership interest in the company. When people buy the stocks, though, there is less ownership in the company by each owner. . [Need an essay writing service? Find help here.]
4. While debt allows for greater capital to work with, it also increases risk. The financial returns accessed by the company are much more likely if there are additional funds for merchandise and advertisements, for example. However, the increased business is not guaranteed even when extra capital is put into advertising and merchandise. The more money a company borrows, the more that company is able to invest, which increases the potential for high returns, but also increases the potential for high risk. The more a company leverages, the harder they will fall if the company isn’t able to be successful.
5. Beta is sometimes used by businesses to measure the volatility of the assets and how they relate to the volatility of the benchmark that is set out by the company. There is always an asset that is being compared to a benchmark in the beta formula. This is measured with representative indices, which is often the S&P 500, which is a collection of a wide range of stocks consisting of 500. These represent a range of industries in the United States. There is some criticism about the measurement because it is one formula that uses past performances to indicate where the price of a stock would be. The beta looks at the risk of an investment by the sole perspective of what the market prices are. So this doesn’t take into consideration the individual business fundamentals and developments that may happen in the economy, such as what happened in the Global Recession. However, many people believe that the history of the financial markets will provide an accurate reading of what will happen in the future. This is an approach that has help company view where they are in comparison to where the average company that is publically listed is at. < Click Essay Writer to order your essay >
6. Systematic risk is used by a company to determine the chances of the market completely failing. This is in contrast to unsystematic risk, which isn’t the entire market failing, but an individual company. Systematic risk discusses the possibility of a complete collapse of the financial markets. The concept could be attributed to the instability of the capitalist system, though such an instability that would lead to such a collapse hasn’t been proven, though it hasn’t been disproven. There is some risk in the financial system because of interlinkages and interdependencies in the market. If one thing crumbles, then that opens up the possibility of others falling too. The unsystematic risk is, instead, the risk that is associated with an individual investment. For example, if an investor buys one stock, that is an unsystematic risk. If that stock fails, then the person loses all their money that was invested into that stock, (Definition, 2012).
7. If my company was awarded $1 million in a lawsuit, I would purchase the building that my clothing company is currently renting, so that I wasn’t paying someone else’s mortgage. I estimate that the building would cost about $400,000. I would then use the money to promote my company in a fashion magazine. This would help attract additional revenue, and would likely be a worthwhile investment. The advertisement and design would likely cost around $50,000. I’d then use the money to fix the lighting in the store so that it was more attractive to the public. I’d also renovate the change rooms and the outside signage. These renovations would likely cost around $50,000. Then, depending on the size of my company, I would consider taking it public and I would need someone to do the work to prepare a plan to go public. This would likely cost around $10,000. With the remaining $490,000, I would invest $250,000 in the stock market. I would then buy gold with the remaining $240,000 in case there was a systematic crash and there was no more financial market and everyone went back to the barter system, because gold will always be worth something if America returned to the barter system. These decisions would be made, of course, only if my company didn’t have any debts. It would be most prudent to pay off any debts that my company might have, so that it wasn’t paying interest, though I would ensure that I put money in the stock market, as the interest I would likely earn would be more than what I am paying on the interest to the banks.[“Write my essay for me?” Get help here.]
Lee, J. (1999). Why do corporations Issue Bonds? The Bond Market.
Scott, E. (2012, April 26). The advantages of issuing stocks. eHow Money.
Unsystematic Risk. (2012). Investopedia.