ABC Ltd. produces an MP3 player. The market for this product is increasing, and for this reason, ABC is planning to expand its production capacity. This plan requires new machinery and an increase in working capital that would be financed with borrowing.
Complete the following:
1. What are the main sources of finance that can be considered?
2. What are the main factors that should be taken into consideration when deciding on the mix of long-term and short-term borrowing necessary to finance the expansion?
3. Identify and discuss the major factors that a bank would take into account before deciding whether to grant a loan to ABC Ltd.
There are several types of capital that a corporation such as ABC Ltd. can use to finance its production expansion. It is this type of capital that is used when financing is required above and beyond the normal on-going revenues. Each type of capital financing has its own pros and cons associated with it. It is important to know all of the aspects of financing to be able to make an informed decision. The first is equity capital or equity financing. This is when a company has a higher amount of current assets verses its current liabilities. It is also known as the net worth of the company. This occurs when the owner or shareholders input cash into the company without incurring any other liabilities. It also occurs when the company has the option to issue stock to raise funds. It is favored approach as it raised money without incurring extra debt. A ...