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Situation: Dragon Inc. is in the business of fireworks production. Their
peak season is usually during the holidays, especially during Christmas
and New Year. The company needs additional PHP500, 000 to finance
their working capital needs during the holiday season.
1. How this should be the Dragon Inc. financed? Should it be financed by
short-term loan, long-term loan, or through equity? Explain, what are the
reasons that are not recommended for financing requirement?
2. Think of other scenarios where a mismatch for financing could be a
problem for a business.
Answers
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Explanation:
Dragon Inc should go for a short term loan in order to fill in the needs of the peak season. They should not go for a long term loan, as this will involve more interest rate and since the peak season has some specific time and the sales generated in such short period can help the company to pay back the loan so its better to have minimal interest rate.
In business operations there can be a mismatch in case of some calamity, some unexpected market turnarounds etc
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