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Published byBlaise Hunt Modified over 9 years ago
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Finance Structures and Issues in the UAE Financial structure is a mixture of long–term debt and equity that a company uses to finance its operations, it’s how much money should be borrowed and the best mixture of debt and equity to obtain.
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Finance Structures and Issues in the UAE Financial structure sources: -Equity: Equity describes the value of an ownership stake or interest in a property. When a corporation is initially established, owners contribute funds to help finance assets -Shareholders’ equity is the amount of funds that have been contributed by the owners of the corporation, plus any retained earnings that have accumulated
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Finance Structures and Issues in the UAE Financial structure sources: -Working capital: Working Capital (WC) is calculated by subtracting a corporation’s current liabilities from its current assets. This financial metric determines a corporation’s operating liquidity and is necessary in understanding how readily available funds are for necessary financial transactions related to daily operations -Working Capital = Current Assets - Current Liabilities
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Finance Structures and Issues in the UAE
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Capital Structure vs Financial Structure Capital structure of a company is long term financing which includes long term debt, common stock and preferred stock and retained earnings. Financial structure on the other hands also includes short term debt and accounts payable. Capital structure is thus a subset of financial structure of a company.
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Sources of Capital for Growth Profits (earnings, net income) Issue new shares of stock Borrowings – Loan from bank – Issue bonds in bond market
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Finance Structures and Issues in the UAE Capital Structure sources: -Accounts payable: -Accruals -Short term loans
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Finance Structures and Issues in the UAE Capital Structure sources: -Accounts payable: is money owed by a business to its suppliers shown as a liability on a company's balance sheet.
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Finance Structures and Issues in the UAE Capital Structure sources: -Accruals are liabilities for services received for which payment has yet to be made, such as unearned revenues, wages, and taxes -.
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Finance Structures and Issues in the UAE Capital Structure sources: -Short term loans with monthly installment or -A line of credit : An agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.
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Finance Structures and Issues in the UAE Capital structure sources: -Bonds -Long term notes payable -Long term loans -Mortgages
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Finance Structures and Issues in the UAE Capital structure sources: -Bonds A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, government agencies…
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Finance Structures and Issues in the UAE Capital structure sources: -Long term notes payable Represent obligations to banks or other creditors based on formal written agreements over one year with a specific interest rate.
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Finance Structures and Issues in the UAE Capital structure sources: -Long term loans A debt evidenced by a note which specifies, among other things, the principal amount, interest rate, and date of repayment for more than one year.
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Finance Structures and Issues in the UAE Capital structure sources: -Mortgages A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments
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Advantages/Disadvantages of Debt Financing Advantages Less risky for investor; therefore cheaper source of capital than stock Tax deduction for interest results in lower after tax cost to company (Tax Shield) Use someone else’s money to increase return to Stockholders (ROE) Disadvantages Increased Financial Risk (risk of Bankruptcy)
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Advantages/Disadvantages of Equity Financing (issuing stock) Advantages Permanent Capital No increase in Financial Risk No legal obligation to pay dividends or return stockholders’ money Disadvantages Highest risk position for investor makes it the most expensive form of capital – Stockholders want a higher return for investing in stock than in the company’s bonds.
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Finance Structures and Issues in the UAE Determine how much Financial Risk is appropriate, given the level of Basic Business Risk. Basic Business Risk + Financial Risk = Total Risk of the Firm Stockholders care about Total Risk Excess debt financing makes the firm risky Debt financing increases the risk of bankruptcy, but helps to avail tax shield.
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