MAINTAINING MANEUVERABILITY FOR COMMERCIAL STRATEGY Homework Help

MAINTAINING MANEUVERABILITY FOR COMMERCIAL STRATEGY

Maneuverability refers to a firm’s ability to adjust its sources of funds in either recursion-increase, in response to changes in the need for funds. That is, the finance manager must keep in a situation where he can change positions. Therefore, while designing the capital, he should not lose sight of the future impact on the present financial plan. For instance, may adopt an aggressive debt policy as it looks good at one point but if in future the firm of additional funds, it may be forced to issue equity shares on unfavorable terms as the a too heavy debt and is, therefore, unable to obtain funds in this form. Due to increased risk, the cost of equity would be higher. Clearly, the opportunity cost of an unwise debt could turn out to be very high. Therefore; in order to preserve operating flexibility, a firm is advised to have unused debt capacity for future needs, that is, it should operate below the safe debt level. The preservation of unused debt capacity can be an important consider the company whose funds requirements are sudden and unpredictable. It gives the financial maneuverability by virtue of leaving the options open.

Finally, however, can be obtained only at a cost. When a finance manager achieves financially, it means that the parry at the other end of the transaction is foregoing something and for this would like to he compensated. Callable preference shares and options for advance pay me long-term debt are devices for maintaining flexibility. But, they will require higher yield to be than non-callable preference shares and long-term debts for a definite number of years. To the finance manager faces the task of risk/return trade-off. He is to assure himself that he buying flexibility at a higher cost than is warranted by gains achieved brought flexibility.

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