Evaluation of Financing Options for FigMint Consulting and Sales Inc
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Added on 2023/06/15
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This article evaluates the financing options available to FigMint Consulting and Sales Inc for their upcoming expansion. The article analyzes financial ratios such as current ratio, debt to asset ratio, debt to equity, return on equity and return on assets to arrive at a recommendation.
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Running head: FINANCIAL ACCOUNTING Financial accounting Name of the Student: Name of the University: Author’s Note:
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1 FINANCIAL ACCOUNTING To: FigMint Consulting and Sales Inc From: XYZ Subject: Recommendation regarding upcoming expansion The upcoming expansion of company requires purchasing of assets for which inflow of cash will be required. Assets will be required for expansion and hiring of additional employees. There are three financing options available to FigMint Consulting and Sales Inc. The first option is issuing of long-term bonds of $ 2000000. Maturity period of bond will be five years that will pay semi-annual interest at rate 4%. Market rate for similar value of debt is 6%. Using this financial option, company will be receiving total cash of amount $ 2000000. Annual cash of $ 80000 will be received by company. Under second financial option, long-term bonds of $ 1500000 could be issued with a maturity period of four years. Interest rate will be paid semi- annually at the rate of8%. If the company finance purchasing using this particular financial option, it will receive a total amount of cash of $ 1500000. Cash that will be received annually stood at $ 12000. Under third option, company can issue 4000000 additional shares at par value of $ 1. This will enable company to make dividend payments to all common shareholders. Dividend will be paid at the rate of $ 0.12 per share. Financing the purchasing of assets required for expansion using this particular option will generate total cash of $ 1600000. The total amount of cash that will be received annually stood at $ 96000. It can be seen that FigMint Consulting and Sales Inc will be able to generate maximum amount of cash using the first financing options that is $ 2000000. Evaluation of all the financing options available to FigMint Consulting and Sales Inc can be done through calculations of financial ratios and their evaluations. Some of the ratios that will
2 FINANCIAL ACCOUNTING assist in arriving at decision of selecting a particular financing option involves current ratio, debt to asset ratio, debt to equity, return on equity and return on assets. Current ratio of company using first financing option stood at 15.37 as against 13.75 and 13.72 using second and third financing option. A higher current ratio is considered desirable but it requires in depth analysis and interpretation. Now, looking at debt to asset ratio, if the company finance assets purchase using first option, ratio is computed at 0.62. When financing purchase and expansion using second option, debt to asset ratio stood at 0.59 and using their option, ratio will arrive at 0.22. A lower debt to asset ratio is considered desirable as it is indicative of the fact that assets of company are enough to meet their obligations (Edwards, 2013). Financing the expansion of business using third option that is issuing of shares will provide company will lower debt to asset ratio. Debt to equity ratio using first financing option will be at 1.67 and company relying on second financing option will have ratio at 1.45. Financing the business expansion using third option will have ratio at 0.44. Lower debt to equity ratio is considered effective because it indicates financially stable business and they are regarded as less risky to creditors or investors. So, financing expansion by issuing of shares will generate lower ratio. Return on equity will be highest at 16.8% using first option as against 16.3% using second option. Third financing option would generate return on equity of 16.4% and hence, it would be suitable to use first and third financing option. It is indicative of the fact that company will be efficient in generating income on new investment (Weilet al. 2013). Return on assets will be higher if company issues shares and the value stood at 8.2%. On other hand, return on assets using first and second option stood at 6.3% and .6%. The highest return on assets is generated using third financing option.
3 FINANCIAL ACCOUNTING After the analysis of given ratios, it can be inferred that financing the expansion of business by issuing additional 400000 shares will be suitable. The second best option will be financing expansion issuing long-term bond of value $ 2000000. Therefore, after the evaluation of all the available financial options, it would be recommended to FigMint Consulting and Sales Inc to finance their business expansion by issuing additional shares.
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4 FINANCIAL ACCOUNTING References list: Edwards,J.R.(2013).AHistoryofFinancialAccounting(RLEAccounting)(Vol.29). Routledge. Weil, R. L., Schipper, K., & Francis, J. (2013).Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.