REAL ASSETS IN CORPORATE FINANCE



Irrespective of whether your business is a Sole Proprietorship, Partnership, Corporation or any other  form, if your mission is to lead a value driven and successful business, then you have to pay attention to the structure of your business.

Corporate finance basically deals with the decision business managers make in order  to make the business viable and profitable.

There are some basic preliminaries that a business has to handle in other to ensure that its foundation is solid. Namely:

a) What real asset should the business invest in? Real assets are tangible assets, "touchable" asset that adds value to a business. E.g. Plants & Machinery, Real Estate etc. They derive their value from their inherent qualities; meaning that its quality is in-built, it has nothing to do with outside perception of its worth.

b) How will these real assets be paid for? Here the Manager begins to examine where the money to purchase these real assets is going to come from. The Manager may consider equity or debt financing.

 - Equity financing means issuing out stock to investors in return for money. Equity financing is available to businesses with legal entities and as such a business such as Sole Proprietorship for instance cannot issue shares to raise money for its business. The advantage of equity financing for the business is that there is usually no agreement between the firm and the equity holders in terms of minimum repayment. As such, the business is not under any undue pressure to pay its investors. Although generally, a well performing business will be required to pay its equity investors dividends or other such bonuses as may be agreed upon by the Board.

- Debt financing means borrowing money in the form of a loan or in the form of bonds. The business has to pay interest and principal in the borrowed funds at an agreed rate and time. The disadvantage of debt financing to a business is that in the case of bankruptcy or winding up, the investors in the debt have priority to be paid first. So in return, debt financing to an investor is a low risk investment; their interest is often protected.

Generally in financing real assets, the cost of debts should be lower than the cost of equity because if a business doesn't have adequate cash flow to pay the interest and principal on borrowed funds, it could put the business in financial distress.

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