Short and Long-term Financing Assignment Example | Topics and Well Written Essays - 2000 words

Short and Long-term Financing - Assignment Example Sainsbury plc uses different types of financing such as borrowing, bank loans, term loans and equity funds to acquire needed cash. Long term finance is usually paid off after a long period of time such as 10-25 years. On the other hand, short term finance needs to be paid off within a year. Long term finance is acquired to fulfil a company's long-term funding needs whereas short term funds are used to finance company's working capital. Sainsbury relies on short term bank loans, bank overdrafts and short term notes for short term financing, and relies on equity shareholder's funds, medium term notes, finance leases and loan stock for long term financing. The company relies on too much loan capital, which is mostly high interest bearing in the long-term. High payments of interest reduce the company's profits. Also, high loan capital weakens a company's credit worthiness and increases risk in future. Equity financing carries high cost because it is more risky for investors. However, equity financing can be used to generate huge capital and payment of dividends is not compulsory. On the other hand, debt financing requires fixed payment of interest compulsorily. Businesses cannot rely on one source of finance rather they endeavour to maintain a mix of debt and equity capital. Companies with high debt capital are considered as more risky and therefore, the cost of capital will rise as creditors will demand more return i.e. high interest because of high risk involved. High risk, high return for investors and high cost for the company. Evidence B Working Capital Management- Sainsbury plc Working capital can simply be defined as the amount of funds in excess of current assets over current liabilities. It is basically the sum of money which is left after keeping aside the funds that are to be paid off to short term creditors. Working capital is used to finance a company's short term business needs and expenditures Working capital has two major elements viz. the current assets and the current liabilities. It can be mentioned as: Working capital = current assets-current liabilities In order to analyse a company's working capital management, it is useful to calculate ratios such as current ratio, quick ratio, receivable turnover ratio and stock turnover ratio (see appendix I). All these ratios help to determine a company's working capital position. Current ratio shows the ability of a company to meet its short term expenses and obligations out of its current assets less current liabilities. Sainsbury plc's current ratio is 0.79:1 at the end of the year 2006 whereas it was 0.57:1 in 2005 and 0.83:1 in the year 2004. It shows that the working capital position of the company has declined by about 5% over the last three years. The company is able to pay off only 79p for every 1 borrowed. Quick ratio is a variant of current ratio. It is calculated on the basis of only the current assets that can be readily converted into cash, excluding inventory and prepaid expenditures. Sainsbury plc's quick ratio is 0.67:1 at the end of year 2006, 0.46:1 in 2005 and 0.67 in 2004. This means that the company is only able to pay off 67p for every 1 of its short term obligations out of its quick current assets. For efficient working capital management, it is very essential that the company is able quickly convert its receivables and inventories into cash. The receivable turnov

The National Income Essay Example | Topics and Well Written Essays - 1250 words

The National Income - Essay Example Thus, net exports denote the difference what a country can produce and what it actually consumes. If the output it produces is insufficient to satisfy consumption, investment, and government expenditures, it will tend to source output from other countries. On the other hand, the net capital outflow is the difference between domestic savings and domestic investment while the trade balance is shown as the total amount that the country receives for its net exports. Through the national income identity discussed above, it can be seen that net capital outflow is always equal to the country's trade balance. If the trade balance and the net capital outflow is positive, the country is running a trade surplus which means that it is a lender in the international financial market and that its exports is greater than its imports. However, if it is negative, it is running a trade deficit which means that it is a borrower in the financial market and imports is greater than exports. Following from this, the impact of any policy on the balance of trade can be identified and assessed by considering its effect in the country's savings and investment. Logically, any policy which causes savings and investment to increase supports a trade surplus while one which causes decline in savings and investment will lead to a trade deficit. In order to ... There are two type of exchange rates: nominal which is the relative price of currency of two countries while real is the relative price of goods of two countries. These two are related in the sense that the real exchange rate is equal to the nominal exchange rate multiplied by the ratio of price levels in the two countries. Thus, if the real exchange rate is high, foreign goods are relatively cheap, and domestic goods are relatively expensive. On the other hand, if the real exchange rate is low, foreign goods are relatively expensive, and domestic goods are relatively cheap. The real exchange rate is directly related to net exports in the sense that when real exchange rate is high and domestic goods are less expensive, it is expected that net exports will be greater as domestic goods will appeal more to other countries and exports are higher. Another determinant of real exchange rate is net capital outflow. It should be noted that the equilibrium real exchange rate is the rate at which the quantity of net exports demanded equals to the net capital outflow. On the other hand, since the nominal exchange rate is determined by the prices of commodities in one country compared to the other, the price level is its most significant determinant. Empirical evidence shows that the high level of inflation which makes domestic goods priced higher will tend to cause a depreciating currency. Chapter 12 The Mundell-Fleming model has been recognized as a dominant policy paradigm for the study of open-economy monetary and fiscal policy. It is the same as the IS-LM Model in the sense that both emphasize the interaction between the goods and money market. Also, these models assume that price is fixed while showing what affects short-run