The Selection of the Best Financing Option of TNA - Case Study Example

TNA Pty. Ltd Report Student’s Name Institutional Affiliation Table of Content Introduction ……………………………………………………………………….………………3 Equity finance …………………………………………………………….………………………4 Retained earnings………………………………………………………………………………….4 Preference share capital ………………………………………..…………………………………5 Debt ………………………………………………………………….……………………………6 Loan ……………………………………………………...……………………………….6 Mortgage ……………………………………………………….…………………………8 Debenture financing ………………………………………………………………………9 Plastic money financing …………………………………………….…………………….9 Lease financing approach ……………………………………………………………….10 The merit of using lease financing ………………………………………...…………………….11 The demerits of using lease financing ………………………………….……………………….12 Evaluation method ………………………………………………...…………………………….13 Recommendation …………………………………………………..……………………………16 Conclusion ………………………………………………………………………………………17 References ………………………………………………………………...……………………..18 TNA Pty. Ltd Report Introduction Organizations in past years were engaged in international business operations seeking to expand their productivity. This has contributed to increased cross-border business with the aim of meeting international capacity and offering competitive goods and services. In the current decade, technology has increased and hence leading to the development of appropriate equipment and appliances for business operations. This has enhanced the multicultural operations and improvement of the economic status of the emerging firms. Furthermore, the companies are supposed to contribute to societal development, especially in the locality they are operating. This is connected to the adequacy of the resources that supports the organization’s daily operations, including the workforce from nearby society. The human resource manager has to ensure the organization is set for resources expansion and meet the international market standard. This requires having strong capital such as financing and equipment that would help in business operations. In selection of the best financing option of TNA, it is important to understand different investment options. The paper will present preliminary studies of these financing options and identifying the appropriate and promising option for investment. The Net Present Value together with other financial options decision making tools is essential in understanding the investment considering the future projection of cash flow. It is important to understand and evaluate different possible fund sources that would help in expanding the TNA sources. Therefore, the possible sources of financial funding include equity financing, retained earnings, loans, and debt and preference share capital among others. The paper will explore some of these financing options. Equity Finance It indicates the source company financing that is obtained from savings that is from outside the firms or the reserves. The TNA Pty. Ltd has different engagement with other companies and business from international capacities whereby global presence influences its operations. The company uses different means in raising capital such as shares in the stock market [Eld16]. The issue of equity share capital helps the TNA Pty. Ltd to sell raise capital through selling to stakeholders regardless whether local or abroad. Like any other limited company, it is essential to consider raising permanent capital that would support the company in its long-term goals and operations. The capital would help in accessing the required resources and equipment required in expanding the international operation in the new market venture. The equity financing is essential to the organization as they are long term in nature. The TNA Pty. Ltd would not be obliged to repay these funds and hence providing great opportunity for business investment, operation and getting returns to repay back. The firm mission is an expansion of the business operations to realize positive and reliable returns [AlA16]. The management has to consider maximizing on the rate of returns as the shareholders require refunds in the future and the company has to increase the share value per performance. The shareholders are more concerned with the firm's operation as they contribute to decision-making and overseeing the business activities. This gives the company a chance to operate with minimal interference credibility and also in credit rating and hence improving the flexibility. Retained Earnings This is part of the profit of the company that is not designated to other operational needs of the organization. The retained earnings are set aside for the organization expenses and payout in dividends. It is classified as the revenue and capital reserves that are raised by the organization from the share sales using premium basis approach [Coh16]. Furthermore, another approach for retained earning outsource is sinking funds and the revaluation of the assets as they contribute to capital reserves. The company may focus on one of these approaches in raising the capital that is required in organization operations expansion. TNA Pty. Ltd requires finding the appropriate retained earnings to obtain the capital for investment and supporting firm’s operations. With the retained earnings, the company always remains intact and strong in facing the market competition that results from other local and international firms [Don16]. Using the retained earning approach to raising capital, the company may focus on reducing the expenditures and hence increasing the profits. The higher the profit, the higher the company gets a large portion of retained earnings. In this form of capital rising, the firm does not incur any interests and hence becoming easier in obtaining capital for the firm’s operations. Preference Share Capital In this financing option, it has the elements of debt and equity. The company has different options for raising the capital through the preference share capital. TNA Pty. Ltd has the platform of using redeemable preference shares. On this platform, the company has the power and authority of repurchasing the shares that were issued before the maturity date with a viable intention and reasons such as an expansion strategy [Rio14]. The irredeemable preference share issuance provides the company with a great chance of permanent control of the funds from the capital market. Furthermore, TNA Pty. Ltd would not have obligations of making the repayment in case the intended venture fails in making profit projected. Another approach is using convertible shares whereby the preference shares are converted into ordinary equity or stock [DeK07]. This would also help in increasing the amount required in the venture of new project to repay the dues. Debt The TNA Pty. Ltd management would choose not to use the existing ordinary stock and focus on getting into debt to finance its project venture. The debt financing helps in using borrowed funds in enhancing its operations. The debt financing has a fixed cost that it must be repaid back with the locked interest rate considering the agreement of the time period [DeK04]. The debts are usually from external sources that are not related to the organization. In most cases, the debts vary depending on the lending institution and time of borrowing and the period the organization is supposed to refund. The lending institution uses different collaterals depending on the period that is short term or long term debt. Furthermore, eternal forces also help in defining whether the firm requires securing the debt with collateral depending on the credit rating and relationship between the lending institution and borrowing firm [Fer16]. The repayment terms depend on the agreement of the debt and principal amount plus the interest rates being charged. The firm repayment progress helps in reducing simultaneously the principal; amount and the interest rates with time. This continues until the entire amount of the debt is fully cleared. The interest rate depends on the terms of the debt either on reducing balance or fixed percentage [Agl16]. The TNA Pty. Ltd may consider different debt platforms that include mortgage, loan and leasing financing. 1. Loan The TNA Pty. Ltd can use the loan in undertaking its projects that are categorized as short, medium or long-term basis. In obtaining the loan, the lender has to scrutinize TNA Pty. Ltd on its capability of repaying loan with the associated interest [Bon16]. The company is supposed to show positive results in terms of cash flow and considerable and recommendable repayment history from previous loans. Furthermore, the TNA Pty. Ltd has to present its future strategic plan and nature of expansion intended to be undertaken. The lender has to use this information seeking to know viability of the firm objective and if the expected returns can afford to repay the loan and interest associated. During the scrutiny period, the lender has to have full access to the major stakeholders’ names and associated assets. These stakeholders are supposed to guarantee the loan from the financial institution and their consent gives higher value transactions [Bae16]. The financial institution focuses on the cash flow of the company and uses the performance history to forecast its future. If the TNA Pty. Ltd product venture is promising, it is an added advantage while acquiring a loan to support its operations. Therefore, the lender has the power of floating charges as well as other forms of securities to ensure the firm oblige in repaying the loan. The financial institutions focus on different options before granting the loan to the organization. The companies having international approach and operations are usually complex and hence lending institution is reluctant to lend [Sar161]. In the case of TNA Pty. Ltd, the company has engaged with international venture making it hard to acquire loans. The lending institution decides whether to offer long-term or short-term loans depending on convenience and payment projection. The lender considers the flexible repayment schedule and considering the short-term loan being appropriate in TNA Pty. Ltd case. The short-term loan is essential for the company as it’s flexible and has reduced risks compared to long-term loan. The approach of long-term investment considers long-term loan of which the lending institution spread the repayment period over the number of years [Kae16]. In deciding to take a loan, the TNA Pty. Ltd has to consider the repayment period, the inflation rate and risks that are involved. 2. Mortgage TNA Pty. Ltd would consider the mortgage as the source of financing the investment, especially for the international project initiated. The arrangements that are provided by the mortgagee give flexible terms that are supposed to be initiated during loan repayment schedule and period. The TNA Pty. Ltd expansion strategy would help the mortgagee to assess the potential of repayment of the loan requested. The decision would be initiated depending on the TNA Pty. Ltd cash flow history and viability of the venture intended to be financed [Rui16]. Other issues such as collateral are essential as they depend on with the value of the mortgage. Furthermore, the relationship of the TNA Pty. Ltd and the mortgagee are essential in defining the terms. The history of the TNA Pty. Ltd such as credit score is essential in determining the amount of loan to be offered and duration of time either short or long term mortgage. The mortgage can be assessed using the nature of the collaterals that TNA Pty. Ltd would provide. These assets can either be land and building with verified documentation of ownership and assessed value. Machinery can also be used in seeking the funds to supplement the assets in accessing higher or new funds. These funds are essential in promoting or boosting the expansion strategy of the firm [HEL16]. The ability of the firm to repay the mortgage helps in defining the duration and amount of loan to be granted. The evaluation report of the TNA Pty. Ltd on the asset values gives a clear indication of the loan to be granted. The advantage of a mortgage is that it has a long period of repayment that can even take up to 25 years. This creates a new negotiation chance for negotiation platform whereby the firm seeks to repay in installments and subsidized interest rate percentage. Furthermore, the repayment can be valued by the firm’s income whereby in every income earned; the certain percentage value is used to repay the loan. 3. Debenture Financing This form of financing is an unsecured loan whereby the TNA Pty. Ltd could use in raising the capital to expand its operation. The debenture financing takes a long period to mature compared to other sources of finance [PET00]. During this long period, the organization can take advantage of it to organize its operations. The organization can consider selling the debenture certificates to holders with the aim of raising the project funds to enter into the international business operations. The secured debenture involves having fixed, the charge on and even floating. The fixed charge debenture indicates the specified assets and hence rigid. Floating charges are flexible like any other assets in operation market. Redeemable debentures ensure the organization can repurchase them even before the maximum redemption period is achieved [ENG16]. This situation is experienced if the debentures have not reached the maturity period and holders force the firm into receivership. The firm considers issuing convertible debentures that later can be converted to other stocks such as ordinary and preference share. Furthermore, on the contrary, is the non-convertible debenture that cannot be converted into other shares. The debenture financing is considered as a favorable method that helps in expanding and providing high-value funds. 4. Plastic Money Financing International companies, mostly use the uses of credit cards in providing available working capital. These companies provide credit card services with the aim of exchanging identified obligations and the latter to be repaid in scheduled platforms. This method is essential in ensuring fraud are avoided and helping the company to improve in credibility [Cam15]. The credit card provides ample time or repayment and hence TNA Pty and hence building a positive and long relationship with the lending financial institution. Therefore, the credit cards have contributed to credibility and accountability. On the other hand, the extreme costs are experienced and incurred in the loading process. The ledger fees and the commission can be huge and hence expensive for a company dealing with huge amount of funds leading to inadequate fund raising for business operation [Mar153]. In supporting the business operations, the credit card is issued to a few employees of the company. Therefore, it can lead to unplanned expenses hence incurring the business operation funds with unnecessary costs. The employees misusing the credit cards focusing on their personal interests, develops the basis of conflict within the organization. The plastic money financing approach should be trusted to royal employees in the company. Another drawback of the plastic money is a limited number of transactions [Dai16]. This form of financing would not be appropriate for the TNA Company as it conducts numerous transactions on a daily basis. The method of using plastic money in financing the ensure operation of TNA would not be achievable and sufficient to maintain the working capital. This requires the company to budget and operate as per the plans to manage the funds from impulse buying. 5. Lease Financing Approach Two parties that are lessee and lessor enter into the leasing agreements. In this case, the TNA Pty. Ltd is lessee as it requires funding and financial assistance expand its business venture. The approach gives the lessee opportunity to use the assets purposely to expand and undertake its operation even though it does not have ownership authority. The lease agreement has short and long terms whereby in the short term [BON16]. The firm has the option of deciding to purchase or leasing the assets depending on the nature of operations. The nature of the assets required helps in defining and deciding on the appropriate lease agreement that is to purchase or lease the assets. The lease agreement considers the depreciation rate and the period. The management considers the equipment with higher value and focuses on the other additional costs incurred during the operations. The TNA Pty. Ltd would opt in leasing the assets using the seasonal agreement in operation. The firm has the capability to enter into the assets, renting as it has positive and promising cash flow. This indicates that the firm is in a position of repaying the lease rental within a short period. Therefore, the management of TNA Pty. Ltd would consider going for a short period lease agreement. The main objective is the cost of the assets and how the company wants to achieve its production strategy. The expansion strategy of TNA Pty. Ltd in venturing into international market provides the great basis of higher income and cash flow in the coming years. In entering into the unfamiliar international market, the company has a higher chance at the extreme edge of either failing or succeeding. This depends on with the intensity of the researches and studies conducted in the area of the venture. The company in the new market can project negative net present value with high promising cash flow in coming years. Therefore, in eliminating possible negative cash flow, the TNA Pty. Ltd should consider leasing the assets as the method of financing its operations. The Merits of Using Leasing Financing In using lease agreements, the firm does not bind on assets whereby they fund on these assets in defined time. This makes the firm plan for its future returns through paying lease rent in the identified period in the lease agreement. In a positive cash flow, the firm pays promptly the lease rent, and hence improving its relationship with the lenders. Sometimes firms may operate in the finance lease whereby it purchases the assets. This would be possible as high returns would help the form in purchasing the assets and later to enjoy the returns [Agl16]. During the period of asset leasing, the firm is in a position of understanding and recognizing the asset viability. The asset leasing helps the firm in accumulating surplus that is used to purchase the assets that it previously could not afford to buy. Therefore, this provides an advantageous platform as it would pay asset rentals without taking extra costs such as maintenance other expenses. Demerits of Leasing Finance In a prolonged leasing period, the asset rental would be higher compared to the cost of purchasing new assets. The leasing process may not provide the need operation assistance in the long run as the firm does not have the mandate of improving or changing the assets. The nature of the operation would be forced to use the asset leased within the agreed period [Dai16]. The firm would not be in a position of changing the assets to meet the demand in the market in a specified period. The lesser do not have a capacity of changing the lease term to comply with the market need or stop incurring huge losses. Considering the credit rating, the firm in the finance leasing does not have an appropriate platform in increasing or lowering the credit rate. This does not provide the good history of the firm that it can use to acquire other short-term fund as the assets appear being on credit in company’s accounting reports. Therefore, all the assets and equipment under the lease are limited hence inflexible financing. Evaluation Method Initial project 2 -7,000,000 1 1 1 -7,000,000 Year 1 $1,118,447 0.995 0.909 0.941 $1,016,770 17,005,457,455 Year 2 $1,764,540 0.990 0.826 0.893 $1,458,297 25,121,698,512 Year 3 $2,227,089 0.985 0.751 0.848 $1,673,245 29,689,280,060 Year 4 $2,594,666 0.980 0.683 0.813 $1,772,192 32,388,305,520 Year 5 $2,943,525 0.975 0.621 0.780 $1,827,697 34,404,790,981 Net Present value factor 0.909 0.826 0.751 0.683 0.621 NPV 1 -2,251,799 -$23,768,967,472 NPV 2 748,201 $24,944,582,528.40 In evaluating the appropriate ideal method of capital gain, the TNA Pty. Ltd should consider the NPV method. This method focuses on the future expectation of cash flow and indicating whether positive or negative to decide on the viability of the project. The NPV focuses on the outflow and subtracting from the inflow while calculating the net value [Ley16]. Having positive NPV indicates that the investment in the long run will increase the firm’s value. The TNA Pty. Ltd investing in Vietnam has indicated the negative approach as the firm would experience decreased value in the outcome. This means the company will experience difficulties in supporting its operations. It shows the Vietnam investment is not attractive as the company would have negative values. The investment returns would be lower compared to the investment costs and expenses and hence the TNA Pty. Ltd should not invest in Vietnam. Sales growth (%) Year 0 20% 30% 30% 20% 10% Total sales revenue (A$) 0% 2,880,000 3,744,000 4,867,200 5,840,640 6,424,704 Proportion of costs (%) 0 60% 50% 50% 50% 50% Total costs (A$) 162,378,500,000 1,728,000 1,872,000 2,433,600 2,920,320 3,212,352 Residual value (A$) 0.00 0.00 0.00 0.00 0.00 200,000 Exchange Rate (VD$/AUD$) 16,238 16,725 17,227 17,744 18,276 18,824 Cash flow (A$) 16,238 1,152,000 1,872,000 2,433,600 2,920,320 3,412,352 Increased labour costs (%) 0% 0.5% 0.5% 0.5% 0.5% 0.5% Labour discount factor (1/1+l)^n 0% 0.995 0.990 0.985 0.980 0.975 WACC (%) 0% 10% 10% 10% 10% 10% Capital Discount Rate (1/1+c)^n 0 0.955 0.826 0.751 0.558 0.621 Inflation rate difference (%) 0.00% 3.0% 3.0% 3.0% 3.0% 3.0% Inflation rate Australia (%) 2.31% 2.31% 2.31% 2.31% 2.31% Inflation rate Vietnam (%) 0% 5.31% 5.31% 5.31% 5.31% 5.31% Inflation discount rate (1/1+i)^n 0 0.941 0.893 0.848 0.813 0.780 Net Present value factor 1.00 0.909 0.826 0.751 0.683 0.621 PV (A $) Project 1 -10,000,000 $1,016,770 $1,458,297 $1,673,245 $1,772,192 $1,827,697 PV (A $) Project 2 -7,000,000 $1,016,770 $1,458,297 $1,673,245 $1,772,192 $1,827,697 The company getting NPV of zero shows the indifference of investing or not investing hence indicating that cost of investment is equivalent to the business operation returns. The capital budget evaluation helps in outlining the nature of the investment focusing on the status of the NPV of project 1. The takeover would be considered viable if the cash flow gets to $7 Million as the NPV of project 2 has positive returns. TNA Pty. Ltd should consider pushing for the project 2 in the Vietnam venture. The investment that shows positive NPV indicates the potential shareholding is increasing its value compared to the negative NPV. Having the negative NPV to the TNA Pty. Ltd shows that operating expenses are over the expected returns cash flow [AlA16]. Therefore, the company is supposed to reject the project one investment and focus in realizing the project 2 with positive cash flow returns. The management should ensure the $10 million investment is subjected to the operation wisely to eliminate the conflict of interests. The firm should consider the appropriate international market to venture that has a positive NPV. Therefore, the TNA Pty. Ltd should consider investing mostly on established and existing resources to gain revenue and setting smaller portion of capital in the foreign country trials. Recommendations In expanding into the Vietnam business strategy, the TNA should consider outsourcing funds from both debt and equity financing. Among the financing option, the firm is supposed to choose the best that would align with the project's terms. This focuses on the value addition and positive return from the expected returns. The company should have adequate capital that should be realized through easy expansion and remaining more competitive in the international market. There are various reasons why the company should use debts rather than equity financing options. The debt financing option would provide the company with higher funding at low interest rates and tax benefits. The equity financing option would affect the interest of ownership dilution and stakeholder’s security. The TNA Pty. Ltd management should focus on concentrating on the loans that aim at promoting the organization growth. This would help in positioning the company through tax savings that ensure a reduction in the capital cost. The retained earnings and debt might not be enough source of funding business operation and the cost of capital. The equity method should only subsidize this shortcoming in the capital raising. Issuing the ordinary and preference shares would help in raising the capital and introducing new stakeholders. Maximizing on the shareholder's wealth would ensure the firm’s value gets a competitive advantage in the local and international market. Conclusion The successful company indicates the ability in managing the working capital, maximizing the shareholder’s wealth and ensuring good management of business operations. In the international venture, the organization should focus on appropriate operational strategies to remain competitive. This is enhanced by sticking and maintaining the brand and the quality of the goods and services offered. The goals of the TNA Pty. Ltd should be flexible to meet the international demand for effective management. Therefore, the firm is supposed to choose the convenient finance options and investing in the projects that show positive NPV. As the NPV used in measuring the possible investment project, it is viable to combine different potential issues such as cash flow of the same projects. Therefore, the TNA Pty. Ltd should focus on investing in the project 2 for its positive NPV. 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