- Examine what companies in similar lines of business have decided about the amounts they will borrow.
– The best way to do this is to look at company averages for borrowing ratios in the industry of interest.
– The distance of a company’s debt ratio from the industry average determines the borrowing decision.
- Financial planning – a detailed examination of the company’s future cash-flow expectations (including those associated with the borrowing alternatives under consideration) so as to decide upon the best choice of financing method.
– The company financial planner, in possession of a capacity to simulate the cash flow and financial statements of the company across the future, asks a series of what-ifs of the planning model.
– The result is a set of possible future outcomes for the company under the sets of conditions / financing alternatives that the planner examines.
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