Principles of Finance

My organization, the army, is structured in a hierarchical mode where employees are appointed positions in the company according to their level of education and amount of experience. Thus, employees with higher levels of education and immense working experience are the ones at the top of the hierarchy. For instance, the general is the most senior followed by lieutenant general then major general and so on.

Despite the army being an organization concerned with the country’s security, it also has to consider investment opportunities to generate additional income. For this reason, real estate development as a long-term investment project presents an appropriate investment venture for the organization (Damodaran, 2001).

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This also requires long-term investment decisions and techniques (Damodaran, 2001). This, however, comes with the issue of capital, i.e., whether to finance the project with equity or debt. In case the army settles on equity, it also has to decide if it will pay dividends to shareholders or not. Apart from real estate investment, the army can also invest in short term borrowing and lending amongst its members as a way of taking care of the financial welfare of its members.

For the real estate project, getting funds is a difficult task that has to be addressed carefully. The army has to evaluate its financial needs in order to raise the appropriate type of capital that would suit its needs of creating, developing and growing its business best (Damodaran, 2001). After evaluating the organization’s financial needs, one would believe that the best funding method for this project is equity.

This would be achieved through collecting seed money from members who are interested in the investment. Seed money funding refers to members investing funds needed to establish a business (Damodaran, 2001). However, this option is impractical for this organization since not all members are always interested in investing in new projects hence the organization would not raise much from members contributions. Therefore, bank loan remains the most appropriate funding source for this project.

I have settled on the debt option (bank loan) for various reasons. First, interest rates and repayment terms offered by most banks are bearable due to competition between banking institutions making them ‘loan-friendly’ (Bruce, 2003). Besides, bank loans are readily available as opposed to having to raise the money from members, making it a fast funding option (Bruce, 2003).

Third, the army is a reputable organization and has good working relationship with financial institutions hence can easily meet the bank’s lending criteria and can be guaranteed lower interest rates and easy repayment terms. Fourth, the organization urgently needs the funds and this can only be obtained from the bank as it will take time to collect money from its members. Last, but not least, the banks rarely require collateral for real estate development loans hence making it an appropriate source of funding for the project (Harvey, 2002).

For the second project, short term borrowing and lending, the army would use profits accrued from the real estate project, i.e., equity (Campbell and Gray, 1997). This would mean that the organization reinvests its profits and end up generating more funds as the members would be charged a small interest on the money lent to them.

This project would take the form of members’ union where members make contributions to the union and this added with the profits from the real estate project form the main capital for this project. I believe this is the most appropriate funding option for the second project as it does not require much capital compared to the first project. Besides, it would be inappropriate for the organization to consider debt option for such a project.

References

Bruce, J. F. (2003). Investment Performance Measurement. New York: Wiley.

Campbell, R. H. and Gray, S. (1997). Investment Decisions and Capital Budgeting. Oxford University Press.

Damodaran, A. (2001). Corporate Finance: Theory and Pratice (2nd ed). New York: John Wiley & Sons, Inc.

Harvey, C. (2002). How do CFOs make capital structure and budgeting decisions. Journal of Applied Corporate Finance, 15(1), 8-23.

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