Accounting (Year 12)
What is Long-Term Management of Finance Options?
Long-term often means maturity in over 1 year. That means the process for an investment horizon for the finance option is typically longer than a year. We have chosen to interpret the term 'management of finance' as relating to the long term investment options available to businesses.
Businesses want to invest in long-term options to allow for larger, more stable sources of funding. These typically require higher levels of due diligence (checks) due to the longer holding position.
Shares are long-term investments where money is used to buy proportion ownership of a company, granting the owner to receive dividends. In addition, the market value of public companies is determined by fluctuating share market prices which could lead to losses or profits when selling shares.
Opportunity to receive a dividend - which could payout rates higher than other investments such as term deposits
Capital gain opportunity - the opportunity to sell the share at a price higher than the purchase price - No knowledge of management is required to own shares
Highly volatile - share prices could rise or fall sharply at anytime
Capital loss - the chance that the shares sold could be lower than the purchase price
No promise of a dividend - if the public company makes a loss, it can decide not to pay a dividend. Dividend payouts can also change every year.
Broker fee to purchase shares. Fees often range from $10 to $20 to buy or sell a share.
A debenture is a loan given to a public company with a promise of regular interest repayments backed by a secured asset. If a public company is late on its payments, the debenture holder can request the sale of a business asset to repay the loan.
Offers a rate of interest often higher than term deposits
A loan is secured by a business asset
The sale of a business asset may take a long time to process - secured creditors will have to apply in court for a receiver to sell the business assets.
Unsecured notes are alike a debenture but they do not come with a promise to sell business assets if the company defaults on its loan. Benefits:
Typically offers a higher rate of interest due to the increased risk
No assets available for security if the business defaults on its loan
Increased risk being if the company defaults (cannot pay back the loan), the loan holder is not guaranteed any property and in most cases will not receive all their money back.
Trusts are where a trustee, a person or business, makes investments and buys and sells assets, such as property, on behalf of its beneficiaries.
Outsources decision-making on investments and property
Trustees can be more skilled at making investment decisions
Trustees can charge fees for their services
Risk of negative returns (losses on investment)
No control over decision-making
Term deposits are where the money is invested in a financial institution for a fixed period of time with the promise of a fixed rate of interest paid annually or upon maturity.
No maintenance - once the money is invested in a term deposit it is locked for a fixed period of time. No action is necessary by the business.
Certainty: Term deposits offer guaranteed returns on investments.
No upfront fees
Limited liquidity - term deposit must mature before being able to be converted into cash, fees apply for early maturity
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