Financial Analysis and Management for AB Plc

This report analyses the financing conditions of AB Plc and suggests alternative sources of financing for the acquisition of an unlisted company. It also establishes a link between financing and investment decisions. The report concludes with a decision regarding the best source of financing which is available to the management of the company for the purpose of meeting the acquisition proposal of the unlisted company.

Running head: FINANCIAL ANALYSIS AND MANAGEMENT
Financial Analysis and Management
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Author’s Note

1FINANCIAL ANALYSIS AND MANAGEMENT
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Alternative Sources of Financing................................................................................................2
Factors which are to be Considered for Raising Capital.............................................................6
Sustainability of Funds for AB plc..............................................................................................7
Link between Financing and Investments decisions.................................................................10
Recommendation.......................................................................................................................11
Conclusion.................................................................................................................................12
Reference.......................................................................................................................................13

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Introduction
The main purpose of the assessment is to analyse the financing conditions of the AB Plc
which is engaged in the business of providing residential construction project. The management
of AB plc is considering acquisition of an unlisted company so that the geographical scale of
operation for the business can expand. As per the current situation, the management of the
company has only been reliant on equity financing for different projects. However, in case of
acquisition of the unlisted company, the management does not have much internal funds to
proceed and therefore needs to select an appropriate source of funding so that the acquisition can
be undertaken without a hitch (Rossi 2014). The report would be suggesting to the management
of AB plc regarding the alternative choices which the business has in terms of meeting their
financing needs. The assessment would further try to establish a link between the financing
source which is selected by the management and the investment decisions which are to be taken
by the management of the company (Bruton et al. 2015). The report would be concluding with a
decision regarding the best source of financing which is available to the management of the
company for the purpose of meeting the acquisition proposal of the unlisted company.
Discussion
Alternative Sources of Financing
In a business, the activities which are carried on by the management are the main revenue
generating source for the business. In order to carry out the activities of the business
appropriately all the businesses need to have access to appropriate funds so that the management
is able to meet the obligations of the business. In the case of AB plc, the management of the
company needs to have appropriate amount of funds so that they can use the same for settling the

3FINANCIAL ANALYSIS AND MANAGEMENT
acquisition of the unlisted business which the management wants to acquire for the purpose of
expansion and growth. The financing requirements of the business can be effectively met by
either choosing debt or equity source of capital (Barringer 2015). In most of the business, debt or
equity sources of capital are popularly used by management for the purpose of meeting the day
to day expenses of the business.
The alternative sources of financing which can be considered by the management of AB
plc are listed below in details:
Equity Financing:
The first option which is available to a business is equity financing which can be used by
the management of the company for the purpose of drawing out appropriate funds from the
capital market. If a business wants to draw capital from the capital market, it must be a listed
company and the company be registered with stock exchanges. This will give access to the
business to lot of funds from the capital market as more and more investors start to invest in the
company. This is considered to be the most common mode for financing the acquisition or
merger process of another business (Schwienbacher 2015). In this process, the management of
the company would be issuing new shares to the public for application and from such a process
draw out capital which is required by the business. A common assumption which is made when a
company intends to acquire a new business is that the former has a sound balance sheet and
strong capital market conditions. These are important facts which needs to be considered by the
management of the company so that they can draw in capital from the market. This option is safe
as the level of risks for such type of financing can be distributed equally among the owners of the
business.

4FINANCIAL ANALYSIS AND MANAGEMENT
In the case of AB plc, the management can issue new shares so that the business is able to
accumulate appropriate amount of capital for financing of projects. The management can then
use such capital generated to finance the acquisition process of the business. However, the
management of the company needs to consider the cost of capital aspect before they make
decisions regarding the same.
Debt Financing:
Another major source which can be considered by the management of the company for
the purpose of financing the acquisition process of a business is by the use of debt capital. The
debt financing option can be availed by the management by approach any one of the financial
institutions and banks (Brooks and Mukherjee 2013). The debts which can be taken by the
management are either bonds or debentures and also loan which can be taken by the business.
The management needs to explain the project which the business is intending and also show
estimated budgets for the same. Once the loan is granted the management would have
appropriate funds in their hands for the purpose of financing any projects. However, there are
certain factors which affects the amount which a person can take as a loan and such factors
include credit ratings of the business, borrowing capacity, collateral securities and other factors.
The management needs to consider the risks and effect of leverage on the overall capital
structure before taking any major decisions for the business (Fatoki 2014). The risks which are
associated with such this source of capital is usually high and there is also a pressure of bearing
regular interests which is associated with the debts. When a company acquires a large quantity of
another company’s debt, it has greater management capabilities during liquidation. This is one of
the advantages which is available to the business and the other is the leverage affect can result in
growth and expansion of a business.

5FINANCIAL ANALYSIS AND MANAGEMENT
In the case of AB plc, the management of the company can opt for debt financing but the
management needs to consider the effect of debts on capital structure and its impact on cost of
capital. The management of the company has an option to either issue bonds for raising the
capital or it can directly raise the required capital from banks. Therefore, it can be said that
issuance of debt capital is also one of the options which is available to the management of the
company.
Exchanging Stocks:
The stocks of a business can also be used as a method to finance an acquisition project of
a business. This has been a common approach which is closely followed by most of the
companies for the purpose of takeover a business. For a management to exercise a stock
exchange option, the management needs to make an agreement with the company which is being
acquired by the management (Agrawal, Catalini and Goldfarb 2014). In addition to this for a
business to exercise stock options, the management of the company needs to have a strong
balance sheet and also a lot of stocks. In this process, the acquiring company aims to make a
settlement with the shareholders of the acquire company that they want to take over the
shareholders. In this method an exchange ratio is computed on the basis of which settlement of
purchase consideration is taken place. The stock exchange option is very common and therefore
is often used in acquisition process of a business.
As per the case of AB plc, the management is trying to acquire the business of an unlisted
company and therefore the management can use this to finance the project of the business. The
management can use this as a source for financing the project which is intended by the
management of the company.

6FINANCIAL ANALYSIS AND MANAGEMENT
Venture Capital:
Venture Capital can be described as one of the popular sources of capital which can be
used for the purpose of start-up or financing a business which has long term viability of the
project. Venture capital is an important source which is considered by most of the businesses for
the purpose of ensuring that the financial requirements of the business is met (Hisrich et al.
2016). Venture capital generally comes from well-off investors, investment banks and any other
financial institutions. Management can also use such source of capital for the purpose of taking
effective internal decisions so that the activities of the business can be undertaken effectively
(Rossi 2015). The management of a company can draw significantly amount of capital from such
a source and therefore it is beneficial for the company (Wilson 2015). It is also beneficial for the
investors as well as they can get higher returns from their investments for the greater risks which
are taken by the company. This source of capital is increasingly becoming popular as this can be
accesses by businesses who are unable to raise capital from capital markets or even through
debts. Therefore, it can be said that the method is an efficient alternative source by which the
management of AB plc can raise as much capital is required by the business.
Factors which are to be Considered for Raising Capital
The factors which can affect the raising of capital for the business are listed below in
details:
 Repayment Terms: The management of the company needs to consider the repayment
terms when they are considered the appropriate source of finance for the business. It is t
be noted that longer term period loans can create significant amount of pressure on the
business of interest (Clark, Jones and Malmquist 2015). In addition to this, the interval

7FINANCIAL ANALYSIS AND MANAGEMENT
for instalments of principle and interest are also to be considered as this is an important
factor which affects the selection process of effective financing of the acquisition of the
business (Fatemi and Fooladi 2013). The repayment schedule for the loans is an
important factor which needs to be considered by the management so that appropriate
selection of loans.
 Interest and Fees Structure: The management of the company also needs to consider the
financing of the business. The interest structure is a factor which is considered for
selection of appropriate source of finance. The interest structure is an important factor
which the management for making appropriate decisions.
 Other factors: There are certain other factors which needs to considered by the
management of AB plc so that the appropriate decisions can be taken. The factors which
the management needs to considers are government regulations, other options which are
available to the management of the company.
 Control over the business: The management of the company needs to consider the aspect
of control which the management would have in case of selection of appropriate source
of capital of the business. The management needs ensure that they have appropriate
capital source for the business.
Sustainability of Funds for AB plc
Internal Factors
The management of the company needs to consider the internal factors which are related
to sustainability factors of the business. The past performance of the business is an important
factor which needs to be considered by the management for determining the source of capital

8FINANCIAL ANALYSIS AND MANAGEMENT
which must be considered (Nemati, Zanjirdar and Masoomy 2015). As per the current capital
structure of the business, the management of the company has not taken any debts for the
operations of the business. The management therefore might not opt for debt capital in the capital
structure as the business has not relied on debt capital in the past.
However, there can be made an argument that the management can include debt capital in
the capital mix so that they can take advantage of the leverage effect. The level of securities
which the management has also an impact on the source of funds which can be taken by the
management of the company. These securities can be offered by the management as collaterals
for taking debt capital for business (Panayotou 2013). There are also other factors which needs to
be considered by the management such as governmental regulations. The other factors which
needs to be consider is the other options for the purpose of financing of the activities of the
business. As per the business conditions which are to be considered by the management of the
business, the management does not have the policy of taking debts.
External Factors
The management of the company also needs to consider the external factors which can
affect the sustainability of the financing sources which is to be considered by the management.
One of the external factors which needs to be considered is the external environment in which
the business is operating. The management needs to consider the market conditions in which the
business is operating. The source of capital which is used by most of the business which is
operating in the market (Fullwiler 2015). The company which is engaged in residential property
business and their source of financing is considered for the purpose of using the same for
financing the activities of the business. The management also needs to consider certain other

9FINANCIAL ANALYSIS AND MANAGEMENT
factors which can affect the selection process for appropriate source of funds for the business.
The factors which are to be considered by the management of the company are the tax rate
interest rate which is applicable on the business (Shen et al. 2013). The tax rate is covered under
the regulations which is brought about by the government and the same needs to be considered
by the management so that appropriate decisions can be taken by the management of the
company.
Figure 1: (Chart showing dip in inflationary rates in the economy)
Source: (Scutt 2019)
The above graph shows that the inflation rate is an important factor which can affect the
decisions making process for the purpose of financing the requirement of the business. The

10FINANCIAL ANALYSIS AND MANAGEMENT
inflationary rates are shown to have reduced over the last few years which shows that the
economy is moving towards a stabilization.
Link between Financing and Investments decisions
In a business, the decisions which is major is regarding the capital structure which is to
be considered. The management of AB plc needs to consider which source of capital will the
business be using such as either equity capital or debt capital. Alteration in the capital structure
of the business has an impact of the financing decisions of the business and therefore decisions
relating to the same needs to be taken with proper analysis (Iranmahd et al. 2014). The capital
structure which the management wants to incorporate in the business so that the operations of the
business. The management must take into account the capital structure before appropriate
decisions are taken regarding the type of funds which is to be acquired by the company.
Weighted Average Cost of Capital (WACC) can be defined as the minimum rate of return
at which a company produces value for its investors. The management of the company needs to
consider such aspect in the decision-making process as the rate is also related to the level of risks
which is faced by the business (Berry, Betterton and Karagiannidis 2014). The weighted average
costs of capital in most of the cases are considered to be the basis on which decisions are taken
regarding the source of capital which is to be used (Magni 2015). In addition to this, while
making investments of any kind as well the cost of capital is considered as per major decisions
are taken by the management of the company.
In order to establish a link between WACC, debt capital used for the project and the NPV
of the project, the first thing to do is to understand the meaning of the concepts. In any the NPV
is always considered for the purpose of making decisions and checking the viability of the

11FINANCIAL ANALYSIS AND MANAGEMENT
project (Cucchiella, D’Adamo and Gastaldi 2015). The management invests in any project for
the purpose of generating efficient returns from the same and enhance the profitability of the
business (Billett, Hribar and Liu 2015). The WACC of a project is considered so that appropriate
returns can be provided to the investors of the business. In case the management of the company
uses one type of capital then that is considered to be the rate of return for the business (Frank and
Shen 2016). In most of the cases, management of the company mixes both equity and debt
capital so that an appropriate mixture of the same can be established and the management can
optimize the risks of the business effectively (Michalak 2016). The WACC is considered to be an
important constraint which can help the business to evaluate the risks of a new investments,
make comparisons for the same with other options which are available to the business, help in
setting a favourable capital structure. In addition to this, NPV of a project is computed
considering the WACC of the business. Plus, the WACC is related to the debt component of the
business as it helps in the valuation process of the company (Baker and Wurgler 2015). The
lower is the WACC of a business, the higher is the valuation of the company which means that
there exists an inverse relationship between the two. WACC is an important metric used for
various purposes but it has to be used very carefully
Recommendation
As per the discussion which is covered in the above paragraph, it can be advised to the
management of AB plc that the management of the company should select debt source of
financing by taking a loan from banks so that the management is able to achieve a favourable
mixture of debt and equity capital which can benefit the business. The management would also
be able to have control over the management which is not the case in equity capital sources. This

12FINANCIAL ANALYSIS AND MANAGEMENT
will also provide the management of the company with tax advantage and thereby help the
business to enhance the profitability of the business.
Conclusion
The above discussion effectively shows that the management of AB plc must choose debt
source of financing as the same would be balancing the capital structure of the business and also
provide a bit of leverage effect. The discussion also shows the alternative options which are
available to the management of AB plc for the purpose of meeting the acquisition expenses. In
addition to this, the assessment also shows a link with WACC of a project, NPV and debt capital
used by the business. The valuation of the company is affected due to such a process and
therefore the same should be considered by the management of AB plc.

13FINANCIAL ANALYSIS AND MANAGEMENT
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