Finance2009

Homework

Choose one the following topics and write a composition of between 250 and 300 in your own words.
1. What different ways can companies use to promote their products or brands? What are the characteristics, advantages and disadvantages of each?
2. What different ways can companies use to finance themselves? What are the characteristics, advantages and disadvantages of each?

I have chosen the number two:

A good scheme of the different sources of funding of a company can be found in the liabilities side of a balance sheet. We can distinguish two general ways used by the companies to finance their activities, namely the own funds and the borrowed funds.

Own funds are the shareholders’ money encompassing equity, shares issue premium, retained earnings or accumulated reserves (internally generated cash flows) and other type of reserves. They are stable money without maturity unless the company is liquidated. The share capital can be listed in a Stock Exchange provided that the financial regulation is in compliance.

Borrowed funds are the real liabilities of a company because they have to be paid back to the lenders. They can be classified in different categories according to their maturity (long, medium and short term) or the origin or formal representation (bonds issued in the market, bank loans. etc).

The main difference between the two general groups of funding is the way they are remunerated. Shares entitle to vote at the Shareholders Annual Meeting and to receive the dividend agreed which is the proportion of the profits distributed provided they exist. On the borrowed money the companies have to pay interest compulsorily even in case of losses. If the business cannot pay its debts, any creditor can have it declared bankrupt. This is the main disadvantage of the borrowed money although on the other hand it allows the leveraging of the profitability. To keep the appropriate balance between the two possibilities of getting finance is one of the challenges of the companies’ managers.

No mark given.

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