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Construction risk case study
Compare equity financing to debt financing
Construction risk case study
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The financial plan of any company is important. One of the most important factors or decisions is the plan to use debt financing, equity financing, or a combination of the two. The decision to go with one or the other is large and mostly relies on personal feelings about the topic. Some owners want full control and therefore lean to debt financing and others lean to equity financing with the ability to give up some control of the company. For the hard charging entrepreneur, the most control is best. All successes and failures can be placed on one single focal point and therefore this allows entrepreneurs greater flexibility in their operations. Concrete Fabricators should apply for debt financing of their heavy machinery and start-up costs.
Concrete Fabricators is a business hopefully on the move in the formwork concrete construction business. The formwork concrete business is a specialized portion of the construction industry which intuitively works with concrete. Concrete Fabricators specializes in the portland cement concrete, the most commonly known “concrete”, portion of the concrete industry which also includes asphalt (Palo Alto Software 2007).
According to the business plan the construction industry was in the beginnings of a large boom. The facts showed this to be true, with the construction market finally collapsing early last year, after about 8 solid years of growth. With this in mind the firm was entering the market at a prime time making the risk factor low with hindsight. Even now the concrete business will always be a needed service, therefore the risk of the business plan might be slightly greater than when originally proposed, but it is still at an acceptable level. An average of 3% growth in the state of Oklahoma shows the potential for a new company without necessarily impeding or infringing on other companies (Palo Alto Software 2007).
A few problems are inherent with the business plan as provided which will need to be amended. The first is payroll. The three main cement layers never receive a pay increase. This is completely ill-logical unless they plan to hire three new guys every year. Everyone needs a pay increase. Also the cement layers are the only workers provided in the payroll estimates. The plan is forgetting the two owners as well as the site foreman, unless these three are the primary cement layers, the senior management staff will need a salary of some type (Palo Alto Software 2007).
Based on the optimal capital structure analysis, they should pursue as 70% debt proportion, which will give them the lowest cost of capital at 11.58%. Currently Star has no debt in their capital structure, so these new projects should begin to add debt to the company. However, no matter what debt and equity proportions are chosen for each project, the discount rate of 11.58% should be used, as the capital budgeting decisions should be independ...
Target Corporation: Report on Long-term Financing Policy and Capital Structure with an Acquisition Analysis Introduction This report will be based on the Target Corporation, and will consist of two sections: 1) long-term financing policy and capital structure, and 2) an acquisition analysis. The first section will include: Target's most recent long-term financing decision; an analysis of the economic, business, and competitive background in which the financing occurred; Target's book value and market value; possible changes that would occur to Target's finance policy and capital structure if it was forced to consider re-organization and bankruptcy strategies; and finally discuss Target's international investment and financing opportunities, as well as foreign exchange risks. The second section will be a report to the board of directors that identifies a synergistic acquisition candidate for Target.
There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an optimal capital structure by using a mixture debt and equity known to act as an advantage leverage. Modigliani and Miller (1958) showed that the decisions firms make when choosing between debt and equity financing has no material effects on the value of the firm or on the cost or availability of capital. They assumed perfect and frictionless capital markets, in which financial innovation would quickly extinguish any deviation from their predicted equilibrium.
The high-risk, cyclical nature of our business demands a strong financial base. We must retain the capital resources to meet our current commitments and make substantial investments to develop new products and new technology for the future. This objective also requires contingency planning and
Growth can overwhelm a business if it is not handled effectively. There are both internal and external risks to growth. Some internal risks that Fellers will face are management risk, not having enough personnel to handle the new demands, having to train or retrain employees; money concerns, such as not having enough cash flow to grow; and quality and quantity control. Some external risks to consider would be related to competition, staying ahead of the curve, continuously searching and retaining customers and staying abreast to what the customers want. Fellers has made her business successful thus far and needs to continuously keep in mind how she became successful to begin with and capitalize on her strengths. Before she decides to grow, she needs to ask herself, at what pace or rate should she grow (CSU,
There is a range of criteria relevant for a decision of financing a new venture. To construct my list for the evaluation of a new company as an opportunity I have selected to refer to t...
Adelman, P. J., & Marks, A. M. (2010). Entrepreneurial finance. (5 ed.). Bedford, Texas: Prentice Hall.
Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.
Concrete is one of the most widely used construction material in the world. The reason for this is because concrete is strong, easy to make and can be molded into various shapes and sizes. Besides that, concrete is cheap, affordable and is readily mix.
When an individual decides to venture out on their own and become an entrepreneur they are taking a huge risk, one of the tools that can make the difference between being successful or failing is the Business Model Canvas (BMC). Osterwalder invented the BMC because he believed that a company’s first business plan always failed the minute it reached the customers, leaving the owners discouraged and deflated and feeling that they had wasted time, energy and money; so he wanted to create a more flexible business plan that owners can edit and make the changes needed to reach the customers needs "One Tool Startups Need to Brainstorm, Test and Win | First Round Review," n.d.). The canvas consists of nine elements or building blocks that create a visual template spelling out the business’s value proposition, infrastructure, customers and the finances (White, 2012). Breaking down the key elements that are vital to taking customers needs, wants or problems into a fruitful company
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
The capital structure of a firm is the way in which it decides to finance its operations from various funds, comprising debt, such as bonds and outstanding loans, and equity, including stock and retained earnings. In the long term, firms seek to find the optimal debt-equity ratio. This essay will explore the advantages and disadvantages of different capital structure mixes, and consider whether this has any relevance to firm value in theory and in reality.
If I were to start my own business, my dream would be to build a surf and skate shop on the Southern California coast. My business would be located on beachfront property in the surrounding area. This business plan will cover two main subjects, 1: an Analysis of the Business Situation, and 2: the Planned Operation of the proposed business. The first topic will cover the subtopics Trading Area Analysis and Competition in the area for my business. The second main topic will cover the proposed organization of the business, the proposed business, and proposed strategies for that business. The analysis of the business situation will cover geographic and demographic information for Huntington and the surrounding area. It will also contain an analysis of businesses in the area which are of similar type, customer buying behavior relating to my proposed business, and the potential location of my business. The Proposed Operation section will address the topics of ownership, start-up procedure, personnel needs, special functions, and an organizational chart. Details of products which will be sold will also be included, as will my business' pricing policy. I would hope that through my thorough planning and explanation that my business idea will be a grand success on the beautiful beaches of California.
Smaller companies are much more likely to obtain an attentive audience with a commercial loan officer after the start-up phase has been completed. In determining whether to extend debt financing--essentially, make a loan--bankers look first at general credit rating, collateral and your ability to repay. Bankers also closely examine the nature of your business, your management team, competition, industry trends and the way you plan to use the proceeds. A well-drafted loan proposal and business plan will go a long way in demonstrating your company's creditworthiness to the prospective lender.
The business plan will also be useful in facilitating the adoption of a strategy that will help the business prosper in the modern market. The plan will be a critical tool that will help in the production of a reliable strategy for attaining the goals and objectives. The proposed business plan will be implemented in three years time. Within the first three years, the business i...