Question

Imagine you are planning to raise capital for the firm, you are wary about shareholders, which accounting ratios could address the concerns of those stakeholders regarding efficiency of the assets and cashflow? Explain in detail.

Answer 1

Raising a capital is subject of adherence to lots of ratios and various limits and approvals.

Yeah,Raising a loan is subject for maintaing firm's liquidity ratios,maintaining balance between fixed cost financing vs free of cost financing.

There are primarily two option available to finance a firm, the first is to raise loan via mortgaging company's asset i.e laon from bankers and other option is to raise finance through issuing comman stock.

Each of the above option has its own advantages and disadvantages.Where option to take loan will negatively impact the following liquidity ratio-

Debt to equity ratio

Debt to total asset ratio

This option is likely to increase the fixed cost of firm in terms of Interest.The fixed interest cost will bring with a advantage of tax saving.Since the interest cost is deductible from taxable income.

Where the other option is to raise finance through issuing comman stock to any entity or person.This option is treated most beneficial because it will make liquidity ratio healtheir.Under this ratios firms are not obliged for any fixed interest.This option has very few of disadvantages like, the cost of finance (i.e dividend) is not deductible from the taxable income and a additional tax called Dividend distribution tax will have to be paid.This option will lead to increase in number of shareholders,hence the power of existing shareholders will be shared with other shareholders.The existing shareholders is likely to oppose the decision of raising finance with no interet bearing option.

Overall comment:-

The firms are required to analyse it current capital structure and its existing ratios, to decide whether to opt for fixed interest bearing finances or to opt for no interest bearing finance.

Thats it,

Please comment for any additional or specific point discussion,

Thanks,