MANAGING FINANCIAL RESOURCES & DECISIONS Essay Example | Topics and Well Written Essays - 2750 words

MANAGING FINANCIAL RESOURCES & DECISIONS - Essay Example If the number of such customers is growing, then, there may be chances that the company may have the problem of shortage of cash. And undoubtedly, for organisations, cash is a lifeblood, without them, businesses will not be able to sustain and continue doing business. Businesses that are too short of cash will not be able to succeed and eventually fail no matter how profitable they may be. It is the policy of credit control that ensures that the smooth flow of cash is constantly occurring and the given amount of credit is within limits. Some credit policies are used to control credit. For instance, some companies ask their customers to repay the amount of credit within a particular period of time. On repaying the amount of credit, these customers will be given some benefit in the shape of additional reduction on the credit amount. Many customers avail the option of this credit policy. And in this way, company becomes able to adjust their control of credit in the most appropriate way. If a company does not control its credit, in the long term, the credit may be changed into bad debts. And when a credit amount is changed into the shape of bad debts, it becomes difficult for the company to ensure the repayment of that amount. Subsequently, this would not be a good sign for the company. And this would put some more pressure on the financial statements of the company in the long term. It is this opportune time for the company to highlight those causes that have contributed in the occurrence of bad debts for the company. P2 (02.1.02): Calculate the WACC of a company, and explain its uses WACC = ke [(market value of equity/A)] + kd [(1-t) (market value of debt/A)]. (Where as A=market value of equity + market value of debt) Market value of total equity = $12*1500 shares; = $18000. Ke = [$0.2 / $12] + 25% Ke = 26.67% Kd (1-t) = 10% . Where A = $18000+$200 A = $18200 WACC = 26.67%($18000/$18200) + 10%($200/$18200) WACC = 26.51% Uses of Weighted Average of Cost of Capital Schweser(c) (2010, p. 34) mentions that weighted average cost of capital is the discount rate which is used to discount the cash flows associated with a capital budgeting project. Weighted average cost of capital is the average cost of finance. Company arranges and uses different means and methods to arrange capital for the purpose of investment in different projects. Equity’s ordinary shares, preferred shares and short term and long term debt are collected with the help of different sources. Undoubtedly, these are important sources and company is required to pay different interests. Collectively, these different interests are paid on different debts obtained by the company, are called as cost of capital. Weighted average of cost of capital takes into account all the relevant factors that have influence on the capital structure of company. By taking into account, company with the help and use of weighted average of cost of capital more exactly achieve the actual and exact co st of finance. Furthermore, weighted average of cost of capital can be used to appraise of some of possible investments. Some companies have different projects for the purpose of investment in them. On the face of it, it becomes difficult for them to make profitable decision. And in order to know which project is going to be more profitable than the other projects available under the investment appraisal