Assignment2 Fin100 - 989 Words

Business Finance and the Capital Structure FIN 100 Strayer University August 4, 2014 Business Financing and the Capital Structure Small business can finance their firms through debt or through equity sources of capital. Debt sources typically include; short or long-term loans from wealthy individuals to banks, while equity sources often include the owner’s wealthy individuals and/or Angel Networks. Venture capital is not a typical source of equity financing for most small business, as these businesses will not have the required growth potential Venture Capitals need to manage their risk return requirements. Explain the process of financial planning used to estimate asset investment requirements for a corporation.†¦show more content†¦Efficiency seeking: Multinational companies may also seek to recognize their overseas holding in response to broader economic changes. For example, the creation of a new free trade agreement among a group of countries may suddenly make a facility located in one of those countries more competitive, because of access for the facility to lower tariff rates within the group. Explain the historical relationships between risk and return for common stock versus corporate bonds. Explain how diversification helps in risk reduction in a portfolio. Support response with actual data and concepts learned in this course. Corporate bonds hold the lowest risk of the two types of investments. The main reason for this is that in the event of bankruptcy, corporate bond holders have a stronger claim to payments than holders of common stock. Common Stock carries the highest risk, because holders are last to be paid in the event of bankruptcy. The risk of investing in a single risky security, such as common stock or corporate bond, is very high due to the company specific risks. Any number of unfortunate events could impact the rate of return. Unsystematic risk can be eliminated by holding a broad portfolio of risky assets; e.g., many different securities in many different industries. The risk that remains after diversifying away unsystematic risk is systematic ri sk. A total stock or bond market fund has systematic risk. This