Synonym Asset Investments and Corporate Finance

Posted on Jan 24, 2025 in Business Administration and Management (BAM)

Synonym Asset Investments

Synonym Funding Liabilities

The functions of the finance department of a company are:

  1. Choose the most appropriate investment projects.
  2. Establish the financial requirements to carry them out and determine their timeline (whether long or short-term).
  3. Study the cost of each of the funding sources that will be used.
  4. Define the dividend policy of the company.

To be considered self-financing, a company cannot get into debt; that is, it is made up of its equity. This may be self-financing in the case of internal resources that are generated by the company or external when it comes to new capital contributions, which are called capital increases.

Self-financing for maintenance consists of the depreciation that is part of the benefits separated each year by the company to restore in the future the value of fixed assets that were lost each year due to use and wear. Self-financing for enrichment consists of reserves that are also extracted from profits. It is called self-enrichment because these funds, if new assets are acquired, are different from those that the company already had.

Advantages and disadvantages of self-financing:

  • Advantages:
    • Increases the autonomy, stability, and freedom of action of the company as it does not depend on external creditors.
    • Encourages reinvestment in the company.
    • Self-financing has tax benefits because it pays fewer taxes on reduced profits.
  • Disadvantages:
    • Risk of unprofitable investment if the opportunity cost is not properly considered. Opportunity cost is what is left to be gained when choosing a particular option.
    • Self-financing is contrary to the interests of shareholders because the money for self-financing is money that they no longer receive as dividends.
    • If the company is listed on the stock exchange and splits dividends, it will be less attractive to new investors. This makes the stock price drop.
    • This reduces the return on equity (ROE) of the shareholder when the leverage effect is greater than 1.

External Funding Sources

These are debts or obligations to creditors and returning capital that can be long or short-term and therefore are non-current liabilities and current liabilities.

  • Loans can be long or short-term. It is a contract between a borrower and a lender. The lender is a financial institution providing the money needed by the borrower in exchange for a guarantee of return and interest. This guarantee may be returned when the mortgage on either real estate or a person outside an endorsement. The elements of a loan are:
    1. The amount requested in the contract, called capital.
    2. An interest rate that can be variable (usually is).
    3. The repayment period may be greater or less than 1 year.
    4. Warranty.
    5. The way and quantity to be returned and requested that the interest is called repayment of the loan. This can be redeemed with a single payment (rare) or periodic installments that can be constant or progressive.
  • Bonds or Bonded Loans are fixed-income securities (long-term financing) that convert the creditor to its owner. Upon finishing the agreed-upon period, the bondholder will be reimbursed for the interest and also the contributed capital.
  • Leasing is a financial lease with a purchase option that allows the company to have an asset (e.g., a freezer) on a rental basis. In this type of financing, the following parties are involved:

    Leasing is mutually beneficial, as the company benefits from leasing as it gets quotas for the client company because it can get 100% financing but with less risk and less paperwork than with a loan and also with the opportunity to acquire the asset by paying a residual value if it decides to exercise the purchase option. In the long term.

  • Credit Policy can be both long-term and short-term. It consists of financing for which the company that needs money opens a bank account with a limit of money. The company can go get the money from this account to finance a particular investment project and only pay interest on the part of the money that has been used, and the unused portion only pays a commission.