Debt and Credit Financing
While there are general rules that each company can rely on to help it determine the best strategies for determining how to finance its short-term and long-term goals. However, as this analysis shows, each company must make financing decisions based on its specific needs and market position.
Companies exist to make money. However, in order to be able to create the products or services with which they can make money, companies also have to be able to bring in money before the point of sale. Building up an inventory requires money (or other forms of capital) and no company can succeed unless it has a well-thought-out and well-defined strategy for financing its ongoing expenses as well as any extraordinary long-term expenses such as building a new factory.
Balancing long- and short-term goals is difficult enough, especially given how volatile the overall economic marketplace can be (as we have all seen to dramatic effect over the last few years). What makes decisions about how to design the financing mix for a company even more difficult and complex is that each company has a particular mixture of debt and equity financing that will serve it best at any given moment.
This mixture is determined by overall market conditions, the position the company holds in its particular market, the history of the company (including such factors as whether it is a start-up, etc.), how closely the company's finances are held (is it a publicly traded company or not), and the nature of its product (including whether it is seasonal, whether it is highly subject to fluctuations in demand, and whether it contains aspects that -- like Beanie Babies -- are highly likely to affect its long-term profitability and stability. This paper examines three important American companies -- Campbell's Soup, Goodyear, and Hewlitt-Packard -- to determine what (given current market conditions) the best ratio of debt financing to equity financing.
Before proceeding to discuss the specific strategies that each company should consider taking given the current set of market conditions, it is important to outline...
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