FINANCING DECISIONS BY MANAGEMENT

sunandaC

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Management plays a very vital role in making important financial decisions. The overall decision in a financing proposition is a composite of several sub decisions on the various aspects gone into above.

These sub decisions provide the frame work for the formulation of a rational judgment. In this process the project may have to be restructured involving location, plant size, phasing of output, product mix, market strategy, capital structure etc. even after taking a financing decision the bank has to be associated with the venture on a continuing basis.

Adequacy of rate of return - The general norms for financial desirability are as follows:
o Internal rate of return: 15%
o Return on Investment: 20-25%
o Debt-service coverage ratio: 1.5-2.0

Appropriateness of the financing pattern - The institutions consider the following in assessing the financial pattern:
o A general debt-equity ratio norm of 1.5:1
o A requirement that promoters should contribute a certain percentage of the project cost
o Stock exchange listing requirements
 
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