Compare long-term instruments and short-term risks, in terms of the various types of risk to which...

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Finance

Compare long-term instruments and short-term risks, in terms ofthe various types of risk to which investors are exposed. Justifyyour answer.

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Financing is a very important part of every business Firms often need financing to pay for their assets equipment and other important items Financing can be either longterm or shortterm As is obvious longterm financing is more expensive as compared to shortterm financing There are different vehicles through which longterm and shortterm financing is made available This chapter deals with the major vehicles of both types of financing The common sources of financing are capital that is generated by the firm itself and sometimes it is capital from external funders which is usually obtained after issuance of new debt and equity A firms management is responsible for matching the longterm or shortterm financing mix This mix is applicable to the assets that are to be financed as closely as possible regarding timing and cash flows LongTerm Financing Longterm financing is usually needed for acquiring new equipment RD cash flow enhancement and company expansion Some of the major methods for longterm financing are discussed below Equity Financing Equity financing includes preferred stocks and common stocks This method is less risky in respect to cash flow commitments However equity financing often results in dissolution of share ownership and it also decreases earnings The cost associated with equity is generally higher than the cost associated with debt which is again a deductible expense Therefore equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk Corporate Bond A corporate bond is a special kind of bond issued by any corporation to collect money effectively in an aim to expand its business This tern is usually used for See Answer

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