Managing Financial Resources and Decisions - Assignment Example

Task Assessing the implications of the different sources for the business In a broader sense, there are chiefly two major sources of finances ly as equity and debt. Both of these sources themselves have their own sub sources, which provide the organizations a greater pool of raising new finance. For equity source of finance, the other sub sources can be private equity capital injected by the shareholders of the newly formed Toppings Ltd. Another source from where Toppings Ltd can finance itself through equity can be venture capital. Raising finance through capital market from General Public can also be an option available to Toppings Ltd at later stage. As far as debt source of finance is concerned, short-term, medium-term and long-term facilities would be available to Toppings Ltd such that Bank Overdraft facility will fulfil the short-term financing requirements of the company. For medium term requirements, Bank Loan can be a viable option for the company. Long-term debt through issuance of bonds or debentures can also be an option for Toppings Ltd however; the option will be available to the company once the company would be listed in local Stock Exchange. Private Equity For the private equity injected by the shareholders of the Toppings Ltd, it will provide the most basic start-up capital for the business. With an appropriate strategy, mission, and the endeavours of those shareholders, the company would take off from its runway and thus create further more opportunities to enhance the business operations of Toppings Ltd by making more sources of finance available to the company. In a way, it can be a long-term investment of each of the shareholder, which may not provide the most likely returns as well. There are chances the desired business may not work as anticipated and can ultimately result in eroding the equity of the shareholders of Toppings Ltd, thus posing a risk factor associated with the investment in this opportunity. Venture Capital Venture Capital is also another form of equity that is available to Toppings Ltd. This opportunity becomes available at the time when the business has spent some considerable time in the industry and started providing some fruitful results indicating the bright future aspects for the business to grow. Venture Capitalist firm is the one, which provides the finance to the company after inspecting all the feasibility, strategy, missions and future aspects of the business. When specific objectives of the venture capitalist firm are achieved, e.g. lapse of time, acquisition of desired returns, etc. the venture capitalist firm disposed off its equity stake in the business to the existing shareholders of the business or to other new shareholders and leaves the business. This source provides a rather short-term availability of finance and provides the venture capitalist an exit opportunity once its objectives are achieved. Initial Public Offer The most important way of any firm to go to General Public for raising finance is through issuance of shares by launching Initial Public Offer (IPO). This option becomes available to business when its business operations would have reached a longer tenure of time, achieved a higher level of stability in its profitability, left an impact upon the General Public in terms of its business goodwill and reputation. This source is costly in raising finance due to higher issuance cost as well as results in dilution of control of the existing shareholders. Bank Overdraft Bank Overdraft facility is the short-term debt facility available to any business but this facility cannot fulfil the objective of acquiring new assets to business. Generally working capital requirement are met through bank overdraft facility, as this debt is generally repayable within one year. Bank Loan Bank Loan facility is considered as a medium-term opportunity of raising finance such that it provides the funds to the business for a period of generally 3 to 5 years. However, this opportunity becomes available to any business once the company has established some historical returns and presented sustainable as well as stable finance performance as reflected by its financial statements. This source enhances the risk associated with the business as well as increase the interest liability. However, due to interest payments, the company reaps the advantage of paying reduced amount of tax payment, as interest is tax deductable. Debentures Long-term debt facility for a period of more than 5 years is normally achieved by the issuance of debentures or bonds in the capital market. However, this opportunity becomes available to the business once it has been listed in the local Stock Exchange such that its shares are trading in the Stock Exchange. The other consequences of this source are almost similar to Bank Loan facility. Evaluate, specifically, what sources would be most appropriate for each part of the scenario i) The restaurant side will also provide an external catering service of Italian food (not just pizza) for corporate and private functions with a typical invoice value in excess of £5,000 For the first part of the scenario, the most appropriate source available to Toppings Ltd can be the private equity injected by the original shareholders of the business as the time of start-up of any business; no outsider recognizes the business, so other opportunities may not be available at that stage. ii) The take-away service will offer home delivery and will need delivery vehicles In order to purchase vehicles after the lapse of considerable time for delivery purpose, venture capitalists can be sought out by Toppings Ltd for this financing. As the company is still at its early stage, therefore, other sources of finance may not be available to the business. iii) It is anticipated that within 5 to 7 years capital will be required for a Head Office building to be built somewhere in the Midlands For the purpose of building up the headquarter for Toppings Ltd somewhere in Midlands after 5 to 7 years, the best possible source of finance available to the company would be Bank Loan facility. Since Toppings ltd would b duly recognized by the bank as it would have its history behind it as well as its financial performance through its financial statements, which can help the bank to assess the ability of Toppings Ltd to repay the loan until the loan term. iv) It is anticipated that in around 10 years the company will want to float on the Stock Market and become a public limited company – Toppings PLC In order to float its shares in the local Stock Exchange, Toppings Ltd would have to launch Initial Public Offer (IPO) with the help of the investment banks. Those banks would subscribe the whole share capital and then resell it to the General Public, in return of commission, which would act as an issuance cost to the company. Investment banks may have to face the risk of under-subscription, as it may not be necessary that the all the shares of Toppings Ltd are duly subscribed by the General Public. Task 2 1) Analyse the costs of different sources of finance There are mainly two kinds of costs associated with sources of finances. First cost is associated at the time of raising finance through that particular source. For instance, with the equity point of view, cost of issuance of shares paid to the underwriters (investment banks) is the major cost to be borne by the company. The second type of cost associated with sourcing finance is the form of return demanded by the finance providers. For example, in case of share capital, shareholders demand dividend as well as the capital appreciation of their investments in the business. For debt holders and banks, the major return payable to them by company is the interest payment, which is obligatory unlike the dividend payments to the shareholders, which is discretionary. 2) Explain the importance of financial planning Financial Planning is the one of the most important task to be carried out by the financial managers. Financial managers need to forecast the upcoming financial requirements of the businesses, which may vary in terms of their duration, purpose and availability of sources of finances. Duration can be short-term, medium-term, long-term. Purpose can be meeting working capital requirements, acquisition of new assets, repayment of older debts, acquiring or merging with another business, etc. Sources of finance available to the company may have the form of equity or debt capital, which have their own sub-categories according to the need of the funding requirement. 3) Assess the information needs of different decision makers The information needs of different decision makers associated with any business can vary. For instance, the providers of finance (investors) may seek out as how the profitability of the company is enhancing and there are opportunities that the firm is cash rich in order to pay them the desired returns in the form of dividends and interests. The directors and management of the business may wish to show increased level of profitability so that their performance can be best reflected in the financial statements. As a result, they may grab the opportunity of receiving fat bonuses and increased salaries. Banks and other loan providers may be interested in the information regarding the risk level of the business reflected the gearing. They might wish to see whether the company has stabilized the equilibrium in its capital structure and have enough cash available to pay the interest as well as the building up of the sinking fund to repay the principal. 4) Explain the impact of finance on the financial statements Financial Statements are actually the reflection of the past financial performance of the business. Whatever the financial initiatives and decisions are taken by the financial managers are presented in the financial statements to make the users of financial statements aware of the financial matters of the business. Investing activities carried out by the company is reflected in the cash flow statement of the financial statement. The sources of financing those investment opportunities are also reflected in the financial statements. Statement of Comprehensive Income reflects the cost of finance especially relating to interest payments. Statement of Financial Position reflects the book value of the key sources of finance. Statement of Changes in Owners’ Equity shows the movement in the equity stake of the business. References Baker, H. Kent . and Martin, Gerald S., 2011.Capital structure and corporate financing decisions: theory, evidence, and practice. New York: John Wiley & Sons. Berk, Jonathan B. and DeMarzo. Peter M., 2010. Corporate finance. 2nd ed. New York: Prentice Hall. Bierman, Harold., 2003. The capital structure decision. New York: Springer. Brigham, Eugene F. and Ehrhardt, Michael C., 2008. Financial management: theory and practice. 12th ed. New York: Cengage Learning. Eckbo, Bjørn Espen., 2008. Handbook of corporate finance: empirical corporate finance. Oxford: Elsevier. Jaffe, Jeffrey and Ross, Randolph Westerfield., 2004. Corporate Finance. New Delhi: Tata McGraw-Hill Education. Wood, Frank. and Sangster, Alan., 2008. Frank Woods Business Accounting 2, Volume 1 (11th ed.). New York, NY: Financial Times Prent. Int. Read More