(Solved) Sources of Finance - PDF

SOURCES OF FINANCE
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Table of Contents
Task 1.......................................................................................................................................... 3
1.1 Identify and evaluate the available sources of finance to the incorporated entities and the
incorporporated entities respectively............................................................................................3
1.2 What are the implications of utilising the internal and the external sources of finance?.........4
1.3 Identify the most beneficial sources of finance.......................................................................5
Task 2.......................................................................................................................................... 6
2.1 Analyse the cost of the available sources of finance taking into consideration the cost of
Dividends, Interest and Tax.........................................................................................................6
2.2 Discuss the essential of proper financial planning with reference to the organisation Clariton
Antiques Ltd................................................................................................................................. 6
2.3 By utilising the given data assess the decision making in regards to the financing of the
takeover by the Partners, the Venture Capitalists and the Finance Broker..................................7
2.4 Discuss how the financial statements will be affected if the financing is made by the Finance
Broker and the Venture Capitalists respectively...........................................................................7
Task 3.......................................................................................................................................... 8
3.1 Present a Cash Budget for the entity Clariton Antiques Ltd. based on the given data and
thereby analyse the decision making in order to improve their financial position.........................8
3.2 Please mention the appropriate method of costing for the entity Clariton Antiques Ltd. and
thereby decide the pricing model.................................................................................................8
3.3 Please select the appropriate project to be undertaken in respect to the data given for
Clariton Antiques Ltd. by using the techniques of capital budgeting............................................9
Task 4........................................................................................................................................ 10
4.1 Please explain the essential components of the financial statements..................................10
4.2 Please compare the financial statements as presented by the Clariton Antiques Ltd., a sole
trader and a partnership firm......................................................................................................11
4.3 Please make an interpretation of the financial statements by utilising the essential ratios and
also compare them with that of the preceding year....................................................................12
Reference List:.......................................................................................................................... 13
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Task 1
1.1 Identify and evaluate the available sources of finance to the incorporated
entities and the incorporporated entities respectively.
There are different sources of finance that are available to different kinds of business entities.
The availability of the sources of finance can be discussed for the two category of entities. They
can be:
● Unincorporated entities.
● Incorporated entities.
Unincorporated entities: The unincorporated entities refers to those entities which are not
incorporated under any act of corporation in any of the territories. The unincorporated entities
mainly refers to the sole traders, partnership firms, co- operative societies and the self employed
persons respectively. But nowadays many of the co- operative societies are incorporated under
respective Corporate Law of any of the territories around the globe. Many of the partnership
Firms are also getting registered as Limited Liability Partnership Firms under the relevant
corporate laws (Lowenstein, 2014)
Now we are to judge the available sources of finance to the unincorporated entities. The
available sources of the finance to an unincorporated concern can be listed as follows:
1. Owner’s Fund: The unincorporated entities can easily avail the capital from the owners.
Owner’s capital is the least risky source of fund for an unincorporated entity as most of
these unincorporated entities are not recognised as a separate legal entity.
2. Loan from relative: The unincorporated concern can also easily get the required loan
from the relatives of the owners. These are also less risky source of capital.
3. Loan from the Banks and Financial Institutions: The sole traders and the partnership
firms and also the other unincorporated entities can avail Loan from Bank but this is
restricted to the amount of the fixed assets available to the entity. This is a risky capital
for the unincorporated entities since most of them are not recognised as Separate Legal
Entity. The banks also keeps the fixed assets of these business as mortgage prior to
sanctioning of Loan. This is also a costly source of capital since interest is also charged
on these source.
4. Cash Credit Loan: Cash Credit Loan is type of Loan which is offered by the Banks in
order to meet the working capital requirement of the business. Cash Credit Loan is easily
available to all the category of entities depending on the position of the working capital
and the operational efficiency of the enterprise.
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Incorporated Entities: The Incorporated entities refers to those entities which are registered under
the corporate law of any of the territories of the globe. Mainly the companies are the
incorporated entities but in the current days many of the co- operative societies and the
partnership firms (LLP) are getting registered under the act of corporation in many of the
territories around the globe (Henning, 2015).
The sources of finance that are available to the incorporated entities can be the following as
hereby mentioned:
1. Equity Capital: The Incorporated Entities can issue equity capital to the members as well
as in the market. Equity Capital is the least risky capital for the entity as there is no
obligation of dividend as well as no obligation of repayment except in the case of
liquidation.
2. Preference Capital: The company can easily raise funds through issuing of the preference
shares in the market since there is a fixed rate of dividend on these shares.
3. Debentures: Debentures are also an efficient sources of finance to the company if the
company is desirous of raising debt capital. The cost of debenture is also low compared
to the cost of equity and preference since there is a tax benefit on the interest on the
debentures.
4. Loan from Financial Institutions: Those companies which are unable to issue debentures
in the market can avail the facility of the loan from the financial institutions in order to
raise debt capital. But this is a very risky capital for the company since these capital
involves the floatation costs and also the assets of the company are secured against the
loan.
5. Trade Finance: The companies can also avail the facility of the trade finance though the
issuing of the Letter of Credit to the banks and thereby can avail export loan.
6. Government Aid: The Incorporated entities gets aid from the Government from time to
time with respect to subsidies, tax relief, etc.
It is to be noted that in addition to the above mentioned sources of finance the incorporated
entities also can avail all the facilities that are available to the unincorporated entities except for
Loan from Relative but the company can also avail Loan from the Director’s Relative after
proving for Explanatory Statement (Egger et al. 2014).
1.2 What are the implications of utilising the internal and the external sources
of finance?
There are ample of financial resources that are available to the entities. But it is essential for the
management of the company to decide an appropriate source of finance prior to opting them in
order to decide their impact in the financial statements of the entity as well as to ensure the
optimum utilisation of the resources.
The implications of utilising internal and the external sources of finance can be discussed in the
following contexts. They are herein mentioned:
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