Running head: BUSINESS
FINANCE
1
Business Finance
Name
Institution
BUSINESS FINANCE
2
Essay 1
Businesses have access to two main sources of financing; debt and equity financing. Debt
financing refers to the traditional source of capital where the business receives funding from a
bank. In contrast, equity financing involves receiving funding from venture capitalists. In this
approach, the venture capitalist takes an ownership in the business. The selection of the
appropriate source of funding is influenced by the financial position of the organization and its
long-term strategy.
The two sources of financing provide different advantages to the business. In debt
financing, the interest’s payments are tax deductible. In addition, it is easy to access (Glen &
Pinto, 1994).
However, the debtor retains the first call on all the assets of the organization.
Moreover, many covenants are associated with this type of financing. Furthermore, they require
current payments. The requirements may prevent businesses with cash problems from accessing
this financing.
Equity financing is also tax deductible (Razin, Razin, Sadka & Yuen, 1998). Moreover,
it does not dilute the ownership of the business. The method of financing does not require current
payments. Furthermore, there are no preferential rights placed on the assets of the business.
However, the current management may lose control of the company. Furthermore, it may result
in the dilution of ownership.
Essay 2
The promotion campaign that is adopted by Merck will aim at creating awareness about
the new and improved drug for treating blood pressure. A combination of several strategies can
BUSINESS FINANCE
3
be used to achieve this objective. The main strategies that can be used are the pull and push
strategy.
A pull promotional strategy involves the use of advertising to generate a lot of customer
demand for the product or service (Lamb, Hair & McDaniel, 2012).
Merck can run
advertisements on television and radio to demonstrate the effectiveness of the new drug. The
viewers will be influenced by the experiences of other people who will have achieved improved
health outcomes because of using the drug. The process can also use other strategies such as
sales promotions and the provision of discounts to early adopters of the drug. Moreover, Merck
can use social media sites such as Facebook and YouTube to generate demand for the new drug.
However, it is crucial to realize that pharmaceutical organizations are limited in the manner in
which they market their products.
A push advertising strategy focuses on creating demand for a product or service through
promotion. For instance, Merck can provide discounts to pharmacists to sell the drug. In
addition, it can organize road shows to promote the new drug. In addition, an appealing package
can be designed to enhance the image of the new product. The use of medical experts in the
promotion would enable the customers to believe that it is an effective treatment for poor health.
The process also enables it to maintain its value and style. The strategy also involves selling
directly to customers. For instance, Merck can approach customers in their places of work and
homes. They have to give a demonstration of its effectiveness.
Essay 3
Ratio analysis is a type of financial statement analysis that is often used to demonstrate
the performance of an organization in key areas. The four types of ration analysis are; short-term
BUSINESS FINANCE
4
solvency ratios, debt management ratios, market value ratios and profitability ratios. Each of
these ratios provides an effective understanding of the financial performance of an organization.
Solvency ratios involve the ability of the organization to fulfill its financial obligations.
The long-term viability of the organization includes its obligations towards debenture holders
and financial institutions that have given them loans (Gibson, 2009). The ratios demonstrate the
ability of the firm to fulfill its fixed interest and repayment obligations. The solvency of the
business organization is determined by its debt equity ratio and proprietary ratio.
The profitability ratios focus on the amount of money that has been earned by the
organization from the total investment that has been put into it. The ratios provide an effective
mechanism for evaluating the performance and efficiency of the organization. There are four
types of profitability ratios; gross profit ratio, net profit ratio, operating profit ratio and the return
on investment ratio. In contrast, leverage ratio refers to capital structure ratio. Leverage ratio is
used to determine the ability of the organization to remain sustainable for a long period. The
term refers to the balance between its obligations and liabilities. In contrast, the capital gearing
ratio involves an evaluation of the relationship between equity share capital and the preference
share capital. The capital gearing ratio demonstrates the financial position of the organization.
The ratio is used to determine the appropriate dividend that should be allocated to each
shareholder.
Although the different ratios serve unique purposes, they all have an important
contribution to make towards determining the financial ability of the organization. Consequently,
each organization has to perform all the different ratio analyses. The practice is widely regarded
as an important accounting process.
BUSINESS FINANCE
References
Glen, J., & Pinto, B. (1994). Debt or equity? How firms in developing countries choose.
Washington, D.C: The World Bank.
Gibson, C. H. (2009). Financial reporting & analysis: Using financial accounting information.
Mason, OH: South-Western Cengage Learning.
Razin, A., Razin, A., Sadka, E., & Yuen, C.-W. (1998). Capital Flows with Debt- and EquityFinanced Investment-Equilibrium Structure and Efficiency Implications. Washington,
D.C: International Monetary Fund.
Lamb, C. W., Hair, J. F., & McDaniel, C. D. (2012). Essentials of marketing. Mason, Ohio:
South-Western Cengage Learning.
5