Financial & Managerial Accting

Discuss the advantages and disadvantages of the following types of financing:

1. Issuing bonds
2. Borrowing from the bank
3. Equity financing

Provide an example of how a public company has relied more on one method of financing than the
others and why it has done so.

Sol.)

1.) Issuing Bonds

Governments and businesses issue bonds to raise funds from investors. Bonds pay regular interest,
and bond investors get the principal back on maturity (Basu, C). Credit-rating agencies rate bonds
based on creditworthiness.

Advantages:

One advantageis that the interest on bonds and other debt is deductible on the corporation's income
tax return.

Bonds offer safety of principal and periodic interest income, which is the product of the stated
interest rate or coupon rate and the principal or face value of the bond (Basu, C).

Bonds are ideal investments for retirees who depend on the interest income for their living expenses
and who cannot afford to lose any of their savings.

Disadvantages:

The disadvantages of bonds include rising interest rates, market volatility and credit risk.

Bonds are also subject to various other risks such as call and prepayment risk, credit risk,
reinvestment risk, liquidity risk, event risk,exchange rate risk, volatility risk, inflation risk,
sovereign risk, and yield curve risk (Basu, C).

2.) Borrowing from the bank

Borrowing money from the bank is one of the simplest ways to get needed funds to start or grow
your business.

Advantages:

By borrowing from a bank, you have a way to fund near-term financial purchases or to achieve
short-term goals.

Banks assume no control over the way you operate your business just because you borrow money.
All they need to know is that you are meeting your loan repayment obligations (Kokemuller, N).

Disadvantages

Having bank loan commitments on your balance sheet increases your debt-to-asset and debt-to-
equity ratios, making you less attractive to new creditors as well as potential investors (Kokemuller,
N).

Borrowing from the bank presents two significant personal and financial risks. One is the risk of
property repossession if you don't pay back a loan secured by your home or car.

3.) Equity financing

Equity Financing is a strategy for obtaining capital that involves selling a partial interest in the
company to investors (Merritt, C). The equity, or ownership position, that investors receive in
exchange for their funds usually takes the form of stock in the company.

Advantages:
With equity financing, you don't have to pay anything back, because you're actually selling partial
ownership in the company to investors. If the business fails -- well, it's their business, too, and it's
their loss, too.

The right business angels and venture capitalists can bring valuable skills, contacts and experience
to your business. They can also assist with strategy and key decision making (Merritt, C).

In common with you, investors have a vested interest in the business' success, ie its growth,
profitability and increase in value.

Disadvantages

The main disadvantage of equity financing is that the founders must give up some control of the
business (Merritt, C). If investors have different ideas about the company's strategic direction or
day-to-day operations, they can pose problems.

There can be legal and regulatory issues to comply with when raising finance, eg when promoting
investments.

References

Basu, C. (n.d.). Advantages and Disadvantages of Bonds. Retrieved from advantages-

disadvantages-bonds-2350.html: http://finance.zacks.com/advantages-disadvantages-bonds-
2350.html

Bonds are subject to risks such as the interest rate risk, prepayment risk, credit risk, reinvestment
risk, and liquidity risk. (n.d.). Retrieved from advantages-and-disadvantages-of-bonds-
65/disadvantages-of-bonds-297-3888/: https://www.boundless.com/finance/textbooks/boundless-
finance-textbook/bond-valuation-6/advantages-and-disadvantages-of-bonds-65/disadvantages-of-
bonds-297-3888/

EQUITY FINANCING. (n.d.). Retrieved from small/Eq-Inc/Equity-Financing.html:

http://www.referenceforbusiness.com/small/Eq-Inc/Equity-Financing.html
Kokemuller, N. (n.d.). Advantages & Disadvantages of Borrowing Money from the Bank. Retrieved
from advantages-disadvantages-borrowing-money-bank-5102.html:
http://people.opposingviews.com/advantages-disadvantages-borrowing-money-bank-5102.html

Merritt, C. (n.d.). The Advantages & Disadvantages of Debt and Equity Financing. Retrieved from
advantages-disadvantages-debt-equity-financing-22700.html:
http://budgeting.thenest.com/advantages-disadvantages-debt-equity-financing-22700.html

Marketing

What is the difficulty in measuring the brand equity of a brand like Coca-Cola?

Sol.

Brand equity is difficult to measure because much of it depends on consumers' perception and
opinions of a brand. Coca-Cola's brand value is difficult to measure because they have extended
their brand to include many products. In addition to the numerous versions of Coca-Cola around the
world who compete against other brands of drinks, Coca-Cola competes with itself.

The ultimate success of an organization is on their ability to create and retain. The best possible way
for an organization to add, create, and retain this value is through innovation, product
differentiation, and keeping their customer's first. The idea of keeping the customer first is where
brand equity plays an important role. According to Kotler and Keller (2012), a brand has high
equity when a consumer has a positive view about the product and how the product is marketed (pg
244). In other words, brand equity depends totally on how a customer perceives a product and their
opinion of the product (Peterson, 2008). This aspect of "customer perception" is what make brand
equity hard to measure. According to Chris Grannell (2013), brand equity is nearly impossible to
measure because a variety of people may respond differently to a particular brand. For example,
Coca-Cola is a product known well throughout the world as their brand knowledge from their
customer base to those who have never tried the product is huge (i.e. the word of mouth aspect has
allowed its brand awareness to reach all corners of the world). When I was in Senegal, West Africa,
even the villagers knew about Coca cola where you could refill your coke in those glasses versus
plastic bottle that we use here. The difficulty in measuring the brand equity of Coca Cola is derived
from the variation of products that the company has introduced into the market (Peterson, 2008).
There are products in the market, which Peterson (2008) notates, that are a part of the Coke family
but it is not highly known to the consumers.In reviewing this question, i find it interesting that
brand equity which equates a certain intangible value and a possible profit is not found on the
balance sheet like Goodwill which is also an estimation of intangible value within an organization.

Reference:
Kotler, P. & Keller, K. (2012). Marketing Management. (14th ed.). Upper Saddle River, NJ: Pearson
Prentice Hall

Grannell, C. (2013). Untangling Brand Equity, Value, Assets and Health.Retrieved from Peterson,
N. (2008). Measuring Brand Equity With Coca Cola Products. Retrieved from
http://ezinearticles.com/?Measuring-Brand-Equity-With-Coca-Cola-Products&id=1712240

Corporate Finance

Every year, Fortune magazine publishes a list of the "World's Most Admired
Companies" and Barrons magazine publishes a list of the World's Most Respected
Companies." Choose one company from the top twenty on either of these lists from the
most recent year available that you also admire or respect and one company that you
admire or respect little.

Part 1: What criteria does the magazine use to evaluate companies for the list? Do you
agree with these criteria? Why or why not?
Part 2: Why do you admire the company you chose as a favorite? Why do you not respect
the company you chose as not admirable?

Both Barrons and Fortune are available at the Saint Leo University Library website via the
ProQuest database. Keep in mind that the most recent list available may be from last
year. Click here for instructions on accessing ProQuest.