debt financing and equity financing
Table of Contents
1.0 Question 1: Critically comment on the sources of long term funds used by the company to finance its operations 2
2.0 Question 2: Based on your answers in part 1, discuss the advantages and disadvantages of using those sources of debt financing over the equity financing for the company. 5
3.0 Question 3: Distinguish between money and capital markets, and evaluate any two types of securities traded in the money markets, respectively 8
4.0 References 11
1.0 Question 1: Critically comment on the sources of long term funds used by the company to finance its operations
The year 2013 annual report of Hup Seng Industries Bhd showed that Hup Seng company uses equity issuing and retained profits to finance its long term projects and operations. The objective of Hup Seng company is to safeguard its ability to maintain operations so as to provide fair share returns to the shareholders. Hup Seng company calculates its financial capacity by consideration of its total equity which is attributable to the stakeholders. Hup Seng company is also invested back its profits to meet its obligations. The realized and unrealized profits are present accordance to Bursa Malaysia Securities Listing Requirements (Hup Seng Industries Berhard, 2013). Retained profits are the earnings which remain after payment of both taxes and dividend. Because of double-entry accrual accounting practice, the retained profits are not represented as surplus which is available for reinvestment. When these profits are reinvested is reflected as increased asset acquisition or liabilities’ reductions. If Hup Seng company can use these earnings to realize above average returns when the liabilities and assets are balanced out, then it is more beneficial than paying as dividends to the shareholders
The debt financing has been mentioned in Hup Seng company’s 2013 annual report however; the source of debt financing has not been specified. Borrowing costs comprise of interest
1.0 Question 1: Critically comment on the sources of long term funds used by the company to finance its operations 2
2.0 Question 2: Based on your answers in part 1, discuss the advantages and disadvantages of using those sources of debt financing over the equity financing for the company. 5
3.0 Question 3: Distinguish between money and capital markets, and evaluate any two types of securities traded in the money markets, respectively 8
4.0 References 11
1.0 Question 1: Critically comment on the sources of long term funds used by the company to finance its operations
The year 2013 annual report of Hup Seng Industries Bhd showed that Hup Seng company uses equity issuing and retained profits to finance its long term projects and operations. The objective of Hup Seng company is to safeguard its ability to maintain operations so as to provide fair share returns to the shareholders. Hup Seng company calculates its financial capacity by consideration of its total equity which is attributable to the stakeholders. Hup Seng company is also invested back its profits to meet its obligations. The realized and unrealized profits are present accordance to Bursa Malaysia Securities Listing Requirements (Hup Seng Industries Berhard, 2013). Retained profits are the earnings which remain after payment of both taxes and dividend. Because of double-entry accrual accounting practice, the retained profits are not represented as surplus which is available for reinvestment. When these profits are reinvested is reflected as increased asset acquisition or liabilities’ reductions. If Hup Seng company can use these earnings to realize above average returns when the liabilities and assets are balanced out, then it is more beneficial than paying as dividends to the shareholders
The debt financing has been mentioned in Hup Seng company’s 2013 annual report however; the source of debt financing has not been specified. Borrowing costs comprise of interest
References: Ağca, S., & Mansi, S. A. (2008). Managerial Ownership, Takeover Defenses, and Debt Financing. Journal of Financial Research. 31, 85-112. Borlongan, J., (2014), How can we distinguish between money markets & capital markets? [Online] Available at: http://budgeting.thenest.com/can-distinguish-between-money-markets-capital-markets-3439.html [Accessed: 23 October, 2014] Chamberlain, T Finnerty, J. E. (1983). Financing Innovations: Debt and Equity. Financial Review. 18, 39. Gombola, M., & Marciukaityte, D. (2007). Managerial Overoptimism and the Choice Between Debt and Equity Financing. Journal of Behavioral Finance. 8, 225-235. Hup Seng Industries Berhard. (2014). Annual Report 2014. [Online] Available at: http://www.bursamalaysia.com/market/listed-companies/company-announcements/1605621 [Accessed: 21.10.2014] Investopedia.com, Certificate Of Deposit – CD [Online] Available at: http://www.investopedia.com/terms/c/certificateofdeposit.asp [Accessed: 24 Oct, 2014] http://www.investopedia.com/university/moneymarket/moneymarket2.asp [Accessed: 24 October, 2014] Lagos, R Mayer, C. P., & Vives, X. (1995). Capital markets and financial intermediation. Cambridge [England], Cambridge University Press. Organisation for Economic Co-operation and Development. (2013). OECD investment policy reviews: Malaysia 2013. http://dx.doi.org/10.1787/9789264194588-en Siddons, S