Financial pros and cons Essay Example | Topics and Well Written Essays - 1000 words

Financial pros and cons - Essay ExampleCapital Budgeting decisions of Debt Financing vis-a-vis Equity Financing and Capital Expenditure The essay analyses the financial viability of setting up a new production plant including the financing decisions and whether Superior Living Inc. should go for an IPO. Financial Analysis of Superior Living Inc. Profitability and solvency position of a corporation is a direct way to understand how well a accompany is performing. For the purpose of analyzing let us look at the following ratios and how the company has fared Net profit margin The Company has been earning a healthy net profit margin which has been constantly increasing from 10.66% in the course to 11.77% in the year 2003. Operating margin The Company has a better direct margin in 2003 of 19.60% over the previous years. This indicates the company is very efficient in managing its operating expenses to generate revenue. Return on Capital Employed The Company have earned handsomely for its investors as fall back so far on its hood employed stands at approximately 25% which is far more than the cost of capital, assuming it to be at 10%. Debt Equity ratio This ratio identifies the solvency of the unwaveringly by measuring the leverage position of a company. Higher the ratio the more leverage a company is and vice versa and hence higher financial risk. Superior Living Inc. has a very low debt equity ratio i.e. ... Pros and cons of going public Raising money by going public indicates accept money from investors in exchange of ownership and control of the company without the obligation of paying back the money. The company as per its convenience benefits the investors by paying dividend from duration to time. This sounds like easy money for the company but the flip side is that the ownership and control over the company would be foregone for the amount invested via equity financing. In the case of Superior Inc. the company is comfortably placed in terms of book d ebts. The debt equity ratio very low which means the company has not used debt to the extent it should have used. Generally the ideal debt equity ratio should be 12 but for Superior its more or less 140. Therefore, the prudent course of action for Superior Inc. is too raise capital by debt financing route which also brings in tax service as interest paid on debts is deductible from profits and dividend paid on equity cannot be deducted from profits. Debt financing does not affect the ownership twist of the company hence the control remains with the owners of the company. Pros and cons of a capital expenditure Superior Living Inc. plans to start a new production plant as part of their expansion plans. To determine the financial viability of the this capital expenditure, various capital budgeting decision tools were used which includes payback period, net present value, internal rate of return and modified internal rate of return. The cost of project is $5,000,000 over a year and c ash flow would start flowing in the company just now from the second year. The expected cash inflow as a result of new production plant is expected to