Discuss how you would expect the financing choices of the following firms to dif

Question

Discuss how you would expect the financing choices of the following firms to differ and explain the reasons for the differences. (Include international and Caribbean examples where possible)
i. A venture that is considered a family firm, compared to a non-family firm.
ii. A venture that belongs to the food industry that is a sole trading firm, compared to a partnership firm.
iii. An early-stage research and development venture, compared to an established venture that is generating revenue.
iv. A venture with revenues that are growing very rapidly and must expand its working capital base to match, compared to a venture with revenues that are growing at the inflation rate.
v. A venture that is highly profitable and growing, compared to a venture that is growing at a similar rate but has not yet achieved profitability.
vi. A venture that is being undertaken by an entrepreneur who has a significant track record of new venture successes, compared to a venture that is being undertaken by an entrepreneur with no previous new venture experience.

Explanation / Answer

Ans :

i) Family firm generally would try to invest their own money or from the family members and relatives rather than debt from third parties. As profit will be shared in same family and the reputation issues are there in the family.

Non family firms would majorly try to get the maximum leverage as each individual has limited their money to invest and barge more on bank financing.

ii) A venture sole trading firm will have its capital structure with debt to equity ratio as high compare to the partnership firm, as sole trader has to rely on his savings and more on debt financing compare to partnership firm, where each partner will include its share to get more funds involved and get more profits.

iii) An early stage research and development firm require more funds from outside like venture capitalist or banks compare to established one, as established have its revenues to invest in the R&D.

(iv) A venture with revenues growing rapidly required more debt financing to get its short term fund requirement complete compare to venture with revenues growing at inflation rate.

(v) Venture that is highly profitable and growing have enough revenues to reinvest in its company, less financing from outside. Compare to venture that is growing but not profitable has to arrange external source of financing like bank finance or suppliers credit etc.

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