Business Opportunity of the TNA Company - Case Study Example

Student’s name: Unit: Word Count: Executive summary This report analyzes business opportunity of the TNA Company, which wants to purchase and acquire ownership of the Vietnamese company. The company deals with manufacturing of the equipment for food processing and packaging. The company is lagging behind its competitors due to old and outdated equipment and high-cost structure. TNA, therefore, needs $A10 million for this business opportunity. Some of the sources of funds needed by TNA to raise stated amount is discussed. These sources include bank borrowing, government sources, and capital markets. A capital budget evaluation is carried to determine whether the opportunity is financially viable and profitable to TNA or not. The Net Present value (NPV) technique is used for this evaluation. From an evaluation, the calculated NPV value is negative thus the company would lose money at the of project's timeframe. It should, therefore, avoid investing $A10 million in the project since it is not financially viable or profitable. However, if it chooses to invest $A7 million it will gain money, and the project would be profitable. Introduction TNA is an Australian company that was established in 1982 dealing with various products solutions. For instance processing, coating, distribution, control and integration, promotion, etc. During the early period of growth, TNA became the first company to have its stand at Interpack, Dusseldorf. Over the years, it has expanded globally having branches in all continents. It plays a big role in food processing industry. Recently it bought and acquire ownership of Florida Company thus increasing the high volume of food processing solutions for a big variety of snacks foods including potato chips and French fries along with new patented technology. It is dedicated to adding value to its customers business by discovering more resourceful ways to package and process food products. Financial needs of any company, organization or business enterprise are of different types; short term, long term, fluctuating and fixed. Companies, therefore, resort to different sources for raising the funds they are in need. Long-term borrowing is majorly considered a necessity for many reasons. Also, equity finance plays a great role in the scheme for raising capitals in the corporate sector. Factors that affect the choice of sourcing funds by companies include cost, purpose and period, risk profile, financial strength and operations' stability and form of business and legal status. Business companies should plan according to the period for which the funds are needed. A short term, for instance, is met through borrowing funds at low-interest rate via commercial paper, trade credit, etc. For the case of long term financial need, sources like debentures and issue of shares are more relevant. Also, long term business growth plan should not be financed by a bank overdraft that will be obligatory to be paid in a short term. It raises recommendation of considering the purpose of funds to match the source with the funds usage. The business Companies plans should also carry out the risks involved in every source of finance they are opting to choose. For instance, there are a fewer risks in equity since the share capital has to be repaid only when winding up, and dividends do not need to be paid if profits are unavailable. Source of Funds for TNA There are various sources of funds for which TNA would be able to raise amount required for investment. Some of these sources include capital markets, government sources, bank borrowing, They are discussed as follows: Bank Borrowing Bank loans are the utmost source of businesses and commercial financing having rates that are easily affordable compared to other sources of capital. Borrowing from banks is an important source of funds for big companies. TNA can seek bank borrowing to raise the capital for its investment. Bank lending is mainly a short term that may be in a form of overdraft or short-term loan up to three years. TNA would keep an overdraft limit that is set by the bank. Interest is charged at a reasonable rate on the amount by which the TNA Company is overdrawn from day to day. Medium-term loans can be lent to the company for three to ten years. The rate of interest charged for the medium-term loan will be set a margin with the size depending on the credit standing and the TNA's borrowing risk. Loan offered may have a variable or fixed interest rate so that the interest charged is going to be adjusted after every three, six, nine or twelve months with current movements with Base lending rate. Bank will also set the minimum standard that large companies like TNA will expect when approaching the bank for the loan. For instance, the company will be required to maintain a minimum level of liquidity, profitability, and revenues. Also, the standard might also restrain the company from taking specific actions such as making an investment, adding more debt or substituting top management without the bank's approval. The Risk Management Association (RMA) Journal analyzed a series loans made to companies and identified various covenants e.g. financial, operating activity covenant, Reporting and disclosure covenants and Cash payout covenants. Financial covenants are limits based on income statements, balance sheets or cash flows. They are directly verifiable and measurable based on the company's accepted metrics of the financial statements. Operating activity covenants dictates how the company will operate its business. This covenant or standard requires that the company operates its business, comply with laws and rules and pay taxes. Reporting and disclosure covenants sets a minimum standard of communication between the company and the bank. The company will be required to provide periodic financial statements, keep proper records and prove loan compliance agreement upon the demand. This covenant will permit the bank to get access to company's record without prior notice. Cash payout covenants will restrict the transfer of wealth amongst the owners of the company. It commonly restricts dividends, prepayment of subordinated debt. This provision will prevent the ability to buy a partner or shareholder even in the event of death. Restrictive covenants that are poorly considered can limit company's ability to respond to market conditions or take advantage of opportunities that may arise (CFO Edge, 2011). The company e.g. TNA can negotiate these covenants with the bank before signing the loan agreement. However, after it has the sign, it will have the responsibility to adhere to the letter of agreement which can have a wide interpretations and implications for the company. The Journal of Accountancy inspires companies or businesses to request a reduction in the penalty when a covenant is tripped, and prepare to negotiate with the assistance of a financial advisor or CPA if the penalty is not reasonably severe. Agreeing to covenants or standards that force the company to maintain the minimum level of liquidity amount that worth them. In the long run, it hurt the company's business or prevent it from raising additional capital or paying employees. Government Funding Funding is the action of issuing financial capitals or assistance mostly in the form of money or other values like an effort to finance a program and project mainly by the government or an organization. The government departments and agencies provide finance for companies in the form of cash grants, contributions, subsidies, taxes, loan guarantees and another form of direct assistance. It does so as part of its strategy in gearing towards developing the national economy especially in high technology industries or companies and areas of low employment level. TNA would make apply for this funding and the government committee will the go through the application and see whether it will provide funds to the company. Also, government acts as loan guarantee for TNA for taking the loan. Government loan programs provide subsidies for through repayment terms, interest rates, and defaults. Loans are lent to the company at a favorable interest's rate, and the repayment schedules may also be favorable. For both loan guarantees and loan, the fees charged to borrowers and interest rates rarely includes enough premium for covering the large defaults that the government must take well. These high default rates rise since the government lending targets very higher high-risk ventures than private lenders and less severe risk assessment before approving loans. Capital Markets Financial markets deal with for buying and selling long-term debt, or equity-backed securities (Moorad Choudhry, 2002). The markets network the savers' wealth to those who can place it a long-term productive usage e.g. government or companies making a long-term investment. Capital markets are referred to markets where money is provided for periods longer than one year. It is concerned with long-term finance. TNA would like to raise capital for long-term investment, and, therefore, its first decision is whether to do by issuing bonds or shares. If it chooses shares, TNA will avoid increasing its debt, and the shareholders may also provide non-monetary assistance like expertise. Shares give the high potential for higher revenues and capital gain if the company does well. Investors use equities or shares to provide the company with capital for an unlimited period. The risks borne by finance suppliers and return demanded of them being the cost of bearing risk raises Company's finance. The state of the company and the economic environment it operates governs all financial instruments' risks issued. The return gained by different forms of finance mirrors the risks exposure every form represents. TNA can relatively raise more funds in capital markets than through private investors or banks. This source of funding, therefore, plays a great role when raising funds for expensive, long-term investments, internationalization plans and growth ambitions. Moving towards regulations and emerging in the banking sector differ with the advantage gained by having an international investor based on the capital market. It results from independence and guarantees greater financial stability and flexibility. Before TNA seeks to fund from capital markets or stock exchange markets, it should have a solid balance sheet and also a well-established processes and internal structures. The company must provide investors with full and consistent information as required by capital stock exchange market and the law itself. International Financing International financing is another source of funds TNA can seek. With beginnings of the worldwide business organizations and the global undertakings of the organizations' business, many companies have access to an international capital market. Several international sources of funds for TNA include; commercial banks, International Agencies and Development banks. Worldwide, commercial banks offer foreign currency loans to companies or organizations for carrying out their business. They play a significant role in sourcing funds to not- trade international processes. Examples of international commercial banks include Asian Development Bank, European Investment Bank, and World Bank Group. International Agencies and Development Banks; some of the international agencies and development banks have developed with time to finance big businesses and international trade. They offer both long term and medium term loans and grants to promote global economic development, Beenhakker, H. L. (2001). An example of these bodies is the International Finance Cooperation. Modern organizations and multinational companies also depend on the international capital market to source their funds for investment. Some of the crucial financial instruments under this include Global Depository Receipts (GDR's) and Foreign Currency Convertible Bonds (FCCB's). GDR can be referred to as negotiable instrument traded free like other security. In Global depository receipts, the local currency shares of a company are issued to the bank. The depository bank in turn gives out depository receipts against these shares. A holder of GDR can convert it to the number of shares it characterizes. The GDR holders also do not possess any voting right but dividends only and capital appreciation. Foreign currency convertible bonds refer to the equity-linked debt securities that must be converted to equity or depository receipts within the specified time limits. Therefore, a holder of FCCB for instance TNA will have the option of either converting them into equity shares at a fixed price or retaining bonds or exchange rate. The FCCB's are allotted in foreign currency and have fixed interest rate lower than other analogous nonconvertible debts instrument's rate Raising Funds from Investors TNA would require raising capital from investors who are interested in the investment. It will have to present to the investors with the high-return project. Through displaying a high potential of the project, the investors would be attracted more in putting their money into the project. After a certain duration of time, usually years, rewards from an investment will be shared with the investors. This brings happiness to investors, and there might be higher chances for them to continue investing further. However, if return fails to meet the intended level, investors will reduce their willingness in investing their money into the funds. It essential therefore for TNA and any other company to show a sense of seriousness and be keen in successfully delivering the project intending to do. Providing evidence planning to investors or funders will be a solid statement to persuade them on the high confidence of the investment. Also, the company needs to demonstrate highly the capability of managing the project or investment until it is delivered fully. The company always faces the prospects of financing agreements that are written to favor the investors more than the company. It is importance especially during the starting stage when negotiating leverage with investors is weak, to be aware of the difference between what is tolerable and intolerable when it comes to forming a financial deal. The company should not agree to terms that will bring limitations or restrictions to company's ability to grow or attract more investors. There are three types of investors a company should choose from. They include angel investors, strategic investors and institutional investors. Angel investors are individuals who are not directly involved with the company having sufficient interest and wealth to invest in the project. They tend to invest early in the history of the company's capital arrangement. By using angel investors, firms or companies raising equity can minimize regulatory requirements as compared with accepting investments from anybody in the public. Institutional investors are bodies whose main mission is to make investments in companies and transactions. They commit materially larger sums of funds per each transaction offered. Strategic investors are entities that have a specific interest the company. They display a long-term interest in possibly acquiring all or big control of the company in which they invest. Capital Budget Evaluation Capital budgeting is importance when evaluating a long-term investment of a company, leading to crucial decision making of whether the investment is profitable or not (Bierman H., & Smidt, S. 1980). The most capital budgeting techniques to evaluate this are the net present value (NPV) and internal rate of return (IRR). Other criteria commonly used is the payback period. Net present value (NPV) is the present value of the future after-tax flows subtracting the investment (Gollier C, 2009). The company will invest if NPV>0 and disregard investing if NPV Read More