A corporation is looking to take advantage of market conditions and begin expanding as soon as possible. To do so, the company requires cash to purchase new buildings, machinery, and other capital goods. What should the directors keep in mind as they consider the type of funding to pursue?
a- the types of saving accounts a bank offers
b- banks will likely offer disappointingly low interest rates
c- involving a bank will likely make borrowing more expensive
d- changes in the stock market
c- involving a bank will likely make borrowing more expensive
When considering the type of funding to pursue for expansion, the directors should keep in mind that involving a bank in the borrowing process will likely make it more expensive. This is because banks typically charge interest rates on loans and have various fees associated with borrowing. The directors should evaluate the cost-effectiveness of bank loans compared to other funding options, such as issuing bonds or equity financing, to ensure they choose the most favorable option for their expansion plans.
c- involving a bank will likely make borrowing more expensive
When considering the type of funding to pursue for expanding, the directors should keep in mind that involving a bank will likely make borrowing more expensive. Banks may charge interest and fees on loans, which can increase the cost of borrowing. Therefore, it is important for the corporation to assess the potential costs associated with bank financing and compare them with other available funding options.
While the types of savings accounts a bank offers and changes in the stock market may be relevant factors to consider in managing the corporation's finances, they may not directly address the issue of funding for expansion. Additionally, although banks may offer low interest rates on certain savings accounts, it is important to understand that borrowing rates may differ significantly from these rates. Therefore, the consideration of low interest rates on saving accounts (option a) and changes in the stock market (option d) should be approached differently than the consideration of borrowing funds for expansion.
When considering the type of funding to pursue for expanding the company, the directors should keep several factors in mind. In this scenario, the focus is on raising capital to purchase new buildings, machinery, and other capital goods. Here are some key points to consider:
1. Cost of funding: The directors should carefully analyze the cost of different funding options. This includes not only the interest rates but also any associated fees and charges. Banks, for example, may offer loans or credit lines with interest rates that could potentially be lower than other sources of funding.
2. Considerations with banks: Directors should be aware that involving a bank in the borrowing process may increase the overall cost of borrowing. Banks usually have strict lending criteria, require collateral, and may charge additional fees.
3. Alternative funding options: It's essential to explore alternative sources of funding beyond traditional banks. For example, the company can consider venture capital, private equity, crowdfunding, issuing bonds, or seeking government grants or subsidies.
4. Flexibility: It is important to assess the flexibility of different funding options. Directors should consider whether they need a lump sum amount upfront or prefer a line of credit to draw upon as needed.
5. Risk tolerance: Different funding sources come with varying degrees of risk. Directors should evaluate the risk associated with different types of funding in accordance with the company's risk tolerance.
6. Market conditions: Keep an eye on changes in the stock market and the overall economic condition. Unfavorable market conditions can affect the availability and cost of certain funding options.
In conclusion, the directors should carefully consider various factors such as cost, flexibility, risk, and market conditions while evaluating the type of funding to pursue for expanding the company. This involves assessing options beyond typical bank loans, understanding the implications of involving a bank, and staying informed about market conditions.