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Appropriate financial instument - Coggle Diagram
Appropriate financial instument
Financing decision:
Funds for projects and activities
In need of funds (financing decisions)
Make-up of balance sheet
high risk of not being able to pay interest or capital
Issuing too much debt
For how long are funds needed
<1 yr: money-market instrument
1 yr: Capital-market instruments
What is the cost of each instrument?
Prefer to pay lowest possible cost
Higher risk = higher cost
What is the cash-flow position like?
No cash to pay regular interest or pref. dividends
then issue ordinary shares as dividends are not compulsory
Availability of different sources or instruments
If ordinary shares have been issued, the shareholders must authorize the issue of more
Bonds only available to government and large organizations, not suitable source of fin for small company
Surplus funds (investment decisions)
What are our needs in terms of cash flow from the instrument?
Steady cash flow requires an instrument that offers steady cash flow, not ordinary shares
Yes: Debentures, pref. shares or MM instruments
What is the risk related to the instrument
Depends on variability of the returns
Government bonds= risk free. Pref shares more risky. Ordinary shares = highest risk
How much risk do you want to take?
For how long do you want to invest?
What are the alternatives
Risk profiles, possible returns, min. investment necessary
What are the possible / expected return for each alt.
Investment decision
: Surplus cash to invest, which instrument should the company invest in