Corporate Finance Essay Example | Topics and Well Written Essays - 750 words

Corporate Finance - Essay Example These are part of the benefits of registering a business as a limited liability entity. In addition to the company being an individual entity from the owners, a limited liability company offers the owners of equity capital to practice risk aversion skills. Owners of equity are not the managers of their organizations. Instead, they delegate this function to other people who they believe are capable of perfectly handling these duties. This way, the owners of equity reduce the likely of a risk of loss happening. Some investors start a business in an industry which they have little knowledge of. However, by making use of experts in that industry, they significantly reduce their risk of loss. Hired managers undertake their duties with a lot of caution, avoiding causing losses to the organization. Separation of ownership and control is a virtual necessity for the successful financing of large corporations since it leads to high performance which subsequently attracts more investors and inc reases confidence among creditors. If an organization is managed by separate persons other than the owners, due care and diligence is accorded to the organization by the management. They exhibit high levels of accountability in delivering of their duties and services towards the organization. With the knowledge that they are held accountable for any in eventualities that may arise from misrepresentation, they show care in their activities. This leads to high performance standards, which attracts more investors and shareholders in to the organization. 2. The tendency of debt ratios varies tremendously across the individual firms. However, debt ratios tend to stabilize within individual firms over a long period of time supports the pecking order model. Pecking order states that as the cost of financing increases, so does asymmetric information. Every organization gets its financing from three sources, which include internal funds, debt and equity financing. Companies therefore have to prioritize their sources of financing. Initially, organizations put into consideration their internal sources of funds. If internal funds cannot adequately meet the organization’s obligations the management considers the use of debt (Baker & Martin, 2011). However, in case this too does not help, the company might consider raising equity as measure of ‘last resort.’ Therefore, internal financing is used first, when it fails the company considers the debt, and when this does not work out, the company raises equity. This theory holds that business will conform to a hierarchy of financing resources and prefer the use of internal financing when it is available. Debt on the other hand is preferred over raising equity in case of debt financing. The extent which a company goes to in financing its operations and the type of fund chosen, the management is sure that the company will in future be in a position to repay. Mostly, internal financing is inadequate. In deciding the most appropriate form of funding between equity and debt, the organization opts for debt financing. There are two types of debt financing available, that is the short term and the long term financing. It is due to the use of debt financing that debt ratios tremendously vary across firms but tend to be stable within individual firms over long periods of time as companies repay their debts. 3. To improve a company’s profitability or popularity, many companies are either involved in hostile takeovers, mergers or