Financial Analysis and Management: Assignment Solution

Financial Analysis and Management:
Part 2

TABLE OF CONTENTS
1. INTRODUCTION.......................................................................................................................4
SECTION 2: EXTERNAL SOURCES OF LONG TERM FUNDS...............................................4
2.1. Suggesting alternative methods of funding to the Board of Directors............................4
2.2 Other long-term source of finance....................................................................................8
2.3 Methods that AB plc might raise external equity funds...................................................9
2.4 Methods that AB plc might raise external long term debt funds......................................9
2.5 Stating factors that need to be considered while raising funds from debt or equity........9
SECTION 3: CRITICAL DISCUSSION ON THE SUITABILITY OF SUCH FUNDS TO AB
PLC................................................................................................................................................10
3.1 Internal factors................................................................................................................10
3.2 External factors...............................................................................................................12
SECTION 4:...................................................................................................................................13
4. Link between financing and investment decision in relation to the acquisition aspect....13
of unlisted company.............................................................................................................13

CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

1. INTRODUCTION
In the context of business unit, financial analysis and management is highly essential for
the attainment of organizational goals & objectives. Financial analysis implies for the process
which in turn lays emphasis on evaluating business projects, budgets etc with the motive to
determine their suitability. Further, financial management refers to the manner in which funds
are managed within an organization. The present report is based on the case scenario of AB plc
firm which involved in the construction of residential property. Now, business unit is planning to
explore business operations and functions with the motive to attain success. Hence, in this, report
will provide deeper insight about different funding sources which can be undertaken by the firm
for expansion purpose. Further, report will also shed light on the interrelation between financing
and investment decision with regards to acquisition aspect of unlisted firm.
SECTION 2: EXTERNAL SOURCES OF LONG TERM FUNDS
2.1. Suggesting alternative methods of funding to the Board of Directors
On the basis of cited case scenario, AB plc wants to expand into new geographical region
for enhancing financial performance of the firm. Hence, for investment purpose, firm requires to
take resort of funding sources available. Case clearly reflects that business organization could not
raise funds by undertaking internal sources. Thus, there are several external sources available
which AB Plc can use for meeting financial requirements such as:
Debt financing: The term Debt Financing is a process when the company raises or
borrowed money or funds for meeting the working capital requirements or other business capital
expenditures by offering of bonds, bills for sale to the individual or institutional investors. These
creditors receive a promise for getting repaid the principal and interest amount on the debt. The
Debt financing methods includes the following:
Bank loan: To expand the business, bank loan plays an important role in the company
which provides a safer view for expanding their operations and business activity. ABC plc can
prefer this method as the loan is easily available to the companies and they provide at very low
rate of interest. They are mostly secured and contains varieties of term loan in the market. Bank
provides loans on the basis of various according to the needs and usage of expansion. Mostly

company prefer loan on the basis of fixed interest or floating interest. The following are the
advantages and disadvantages of adopting Loan option as ~
Advantages Disadvantages
 The main advantages is that they
provide very low fixed rates of interest
which helps the business to grow their
business operation.
 The business which raise their equity
capital in the market often prefer to
give some amount of money to the
stakeholder but to prefer the bank loan
method, bank allows the borrower to
pay the principal and interest amount.
 With the help of Bank loan as a source
if funding, individual or company can
take accounting as well as tax
advantages and benefits.
 It requires the lengthy paper work and
lot of formulates to guarantee the
loans. It assembles to be on the basis
of strong business credit and that's the
only reason for loan approvement.
 It is the most time consuming method
as it takes time to finalise the loan.
 One of the biggest disadvantage in
bank loan source of funding is that
Bank on providing prepayment facility
charges penalties and fines amount
from its customers.
Debentures: It is a type of debt instrument ranging from medium to long term period.
AB plc can use this debt instrument for raising funds for long period. This debt instrument helps
company in borrowing money or capital fund at a fixed rate of interest. It is used by company as
long-term loans having an interest rate and repayable on a fixed date (Nayyar, 2015). Debenture
is a type of debt instrument which is not secured by any physical assets of the company or
collateral security.
Advantages Disadvantage
 Financing through debenture is
considered as less costly process of
raising funds externally in comparison
with raising funds from preference or
equity shares. This is because of
interest on debentures is tax
deductible.
 Every company has its own borrowing
capacity which reduces the further
borrowing capacity of a company
 Debenture holder doesn't have right to
vote or share company's profits.
 Issuing of debenture is not considered
suitable for companies which are not

 It should be issued when company is
having stable earnings from sales.
 Issuing funds from Debenture are
considered as less risky investment
option. This is because debentures
comes with interest payment which is
charge against profit. The date and
rate of interest is fixed on the time of
issuing.
having fixed income or revenue
sources.
 Debentures which are of secured
nature requires large portion of fixed
assets with the company.
Equity financing: From word Equity financing, it can be defined as the process of
raising capital funds through the sale of shares. It is financing of public as well as private
company which is listed on the stock exchange. Equity financing can also be refer as the making
sale of ownership stake or interest with the purpose of raising fund amount for meeting business
operations. Equity financing methods includes the following:
Venture capitalist: Venture capitalist is a type of private investors which provides
private equity financing mode. A venture capitalist is also known as an investor who supports
small companies or start-up ventures by providing various capital or financial supports in form of
resources, information etc. who wishes to expand their business operations but do not have
access to equity markets. Venture capitalist are those firms or entities which provides financial
assistance in form of capital funds to small, newly emerging firms or start ups at the early-stages
for expanding or starting new business operations especially to those having high growth
potential (Park, Li Puma and Prange, 2015). AB plc can use this financing mode for raising
capital funds.
Advantages Disadvantages
 New innovative projects and ideas
which will offers high profitability in
long run, can get financed through
 Benefit provided by venture capitalist
can be realized only in the long time

venture capitalist.
 Along with capital funds, venture
capitalist also support by providing
factor such as information, expertise,
technical assistance for make a
business successful.
 Venture Capitalist have wide
industrial connections and expertise
knowledge, which start- up owners
can make use of by inviting them as
advisory board.
period.
 As financed by venture capitalist, it
leads to dilution of control in the
ownership of business. By acquiring
majority shares or stake, interference
level is high in day to day business
activities.
 The more the involvement of Venture
Capitalist or Venture investors in the
start -up business or small company,
the more will be the diminishing rate
in the ownership proportion of the
existing owners.
Issue of shares: Issue of shares refers to the process of issuing shares or common sto
cks of the company to public at large, inviting them to subscribe and purchasing of the shares of
the company. It is the method through which new or existing shares are issue to the shareholder
to earn money and also maintain the company reputation at large scale. The shares can be issued
to any public, body corporates and any issues who can raise funds from the issue of shares
procedure. To issue share they have to follow the three condition such as issue of prospectus,
receiving application for the issue of shares and allotment of the shares prescribed under the
companies Act. AB plc can issue share in two types - equity share which is relevant to the
ownership of the company and preference share which means to carry the two or more
preferential rights of the company.
Advantages Disadvantages
 By issuing share is the market
company saves some amount of risk
such as underwriting fees,
 To issue share in the market it reflects
the bad impression among the
customers as the views is that company

advertisement cost and other related
issues.
 To issue shares in the market,
shareholders have right to vote in the
company and also has power to take
decision in critical matters which
provides benefits to the company.
 Issuing of shares do not carries any
burden or obligation to pay a fixed
rate of dividend to the shareholders of
the company.
can't run smoothly and operate its
activities which result in issuing shares
in the market.
 If company raise more shares in the
market and also the demand is
increasing it results in diluting the
share value in the market and also not
able to raise more funds to achieve
their target.
 With more issuance of shares, the
company's ownership gets diluted
more and thus has to share more
profits when earned.
2.2 Other long-term source of finance
Sukuk: A Sukuk is a considered as an Islamic financial certificate which complies with
the Islamic religious law called Sharia. It is a known as Shariah compliant debt instrument which
works on the principles, guidelines and standards of Sharia law which are set forth by the then
governing Islamic scholars. These are alternative options available for Muslim as well as non –
Muslim investors, shareholders in lieu of conventional bonds (Klein and Weill, 2016). Sukuk
instrument offers a fixed income or profit amount to its investors or shareholders at the
predefined fixed regular intervals time period which ensures cash flow on steady basis for
investors. Sukuk don't carry any lock in period.
Advantages Disadvantages
 Islamic security known as Sukuk can
be issued with different risk and yield
factor.
 It helps in allowing the Muslim and
non- Muslim investors in making a
choice among the portfolio which is
best suited as per their risk taking
ability or risk management profile.
 As per Sharia Islamic religious law,
Sukuk don't offer interest rate or Riba
as it is prohibited instead investors are
offered a stake or share proportions in
the actual investment.
 Sukuk is not risk free instrument. Price
risk, Credit risk, Liquidity Risk and
Default risk are some risk associated

with Sukuk security.
For AB plc. It is recommended to raise funds from Sukuk security instrument. As this
instrument doesn't have lock in period and also offers a stake or share proportion in the actual
investment amount. By raising funds form Sukuk, both the Muslim and non Muslim investors are
allowed to make a choice among different available investment opportunities as per their own
risk profile.
2.3 Methods that AB plc might raise external equity funds
AB plc might raise external equity funds with right issues which is a dividend of
subscription rights to purchase additional securities in the organization made to existing security
holders of organization. The rights are for equity securities like shares, in a public organization
which is non-dilutive pro-rata aspect to raise capital. In the same series, it could imply placing
which engages issue of new shares for cash to chosen subscribers instead of shareholders as a
whole which is form of non-pre-emptive offer. The share recipients are institutional shareholders
where is possibility to hold shares as long term investment.
2.4 Methods that AB plc might raise external long term debt funds
AB plc might increase its long term debt with context of debenture as it is debt
instrument used through organization and government for issuing loan. It is not secured through
collateral and rely on creditworthiness along with reputation of issuer for support. Apart from,
hybrid instruments might be used as it is loan agreement which is treated for objective of act as
being an equity arrangement opposed for normal loan arrangement. When organization owes
debts and pays interest, company can ordinarily reduce from its taxable income and interest is
paid on loan.
2.5 Stating factors that need to be considered while raising funds from debt or equity
The general factors which considered in raising debts or equity funding is firstly related
to dilution of control. In these factors, when company issue new stock in market which decreases
the value of exiting shareholder percentage of ownership in the company. It results in decreases
the value of shares. If company wants to raise the equity and debt they have to control the

dilution of shares in the company. Second factor is related to cost issue. When the cost is higher
at that time company is already facing financial problems it increases the risk of insolvency.
Similarly, larger the company investing as debt and equity larger they facing risk in respect to
lenders and investors. Third factors is in terms of Security in raising debts and equity. Loan and
credit lending is the best way to secure the business from facing challenges. Fourth factor is of
duration time period. They have to repaid the money to the lenders and investors along with
interest rate at the certain date when company is stable to manage its operational activities.
SECTION 3: CRITICAL DISCUSSION ON THE SUITABILITY OF SUCH
FUNDS TO AB PLC
3.1 Internal factors
Sources of funds Past performance Gearing level Ability to offer
security
Debt financing &
Debentures
It enhances the
performance of the
company as it
facilitates funding on
the lower interest rates
and ownership is not
diluted. So with
reference to the study
it is determined that in
past years the
companies who raises
fund through this
alternative has lead to
growing financial
performance.
This level helps the
firm in measuring the
amount of debt
funding involved in its
operations against the
level of owned funds
so that company can
manage its operations
with balanced debt and
savings.
Debt financing is
considered as less
secured because it
involves the
repayment and the
payment of the interest
amount event at the
time of loss.
Equity
financing&Issue of
It enables the firm in
raising the large funds
Gearing level
interprets the amount
Equity financing is
more secured as

shares without the interest
obligation and act as
the capital of the
company which
influences greater
earnings and increases
the profitability of the
business. As per the
study, it is stated that
through equity
financing firm can
perform better with
large capital and can
reinvest its returns in
new projects for
higher profitability.
of owned funds used
in running the
operations of the
business against the
borrowed funds
(Factors determining
debt and equity
choices of a firm in
Kenya, 2019).
compared to debt
financing as it
facilitates holding to
the shareholders in the
ownership of the
company. Dividend
are distributed based
on the profits which
means high profits
reflects high dividend
or vice versa.
Venture capitalist The past performance
of this source of
funding is considered
as low because high
risk is involved in such
funding.
Companies that
contains high level of
capital gearing when
the debt proportion is
high than equity. In
this funding high debt
is involved with high
financial risk and the
equity is expressed as
the debt for the
corporation.
Venture capitalist
funding are offers very
little security because
loss in the project
leads to the loss of
huge amount of
money.

3.2 External factors
Sources of funds Economic climate Tax rate Interest rate
movements
Debt financing &
Debentures
This financing
involves the payment
of higher interest rate
which affects the
economic climate as
high debt means high
interest which results
in adverse effect on
the economy as
financial burden
increases.
Tax rate plays a
crucial role in debt
financing as it
provides for tax
deductions to the
enterprise. It benefits
the firm as it get the
funds available at
discounted rate. On the
other side higher tax
rate than the bank rate
causes the loss to the
company (Investment
Decisions, 2016).
This factor affects this
financing to a larger
extent as it involves
the interest obligation.
High inflation in the
market leads to higher
interest rate which in
turn incurs high
expenses for the firm
and this financing will
not be suitable in that
case. Changes in the
economic policy lets
to change in the
interest rate and this
influence the decision
making of the firm to
opt for this financing
or not.
Equity financing &
Issue of shares &
Venture capitalist
In the case of stable
condition, people
prefer to make
investment in the
shares of firm. Hence,
such condition places
direct impact on
funding aspect.
- In the case of incline
in interest rate profit
will be decreased. This
in turn places negative
impact on the dividend
decision of firm
(Factors determining
debt and equity

choices of a firm in
Kenya, 2019).
SECTION 4:
4. Link between financing and investment decision in relation to the acquisition aspect
of unlisted company.
The term Investment Decision refers to the decision making process as undertaken by the
investors, shareholders of the company or decision taken by the top level management.
Investment decision are taken in respect of the fund amount or capital amount which can be
deployed in the investment opportunities with the motive of earning return at moderate or high
rate. It is thus a process of selecting the best asset type by the company for making investment
with the available fund amount.
Financing decision is concerned with the process of borrowing and making proper and
effective allocation of funds as required for making investment (Sun and et.al., 2016). This
financial decision can involves funding from both the internal sources such as share capital,
retained earnings as well as external sources including debenture, loan etc. of the company.
When a company makes financing decision, it lays its impact on the investment decision
making process as well. The objective behind financial decision making is to maintain an
optimum capital structure of the company i.e. having a proper mix of debt and equity in the
capital structure of the company so as to ensure the trade-off between the risk and return
available to the shareholders of the company. On the other hand, the motive of decision making
related to investment and financing aspect is to maximize the wealth of shareholder by sharing
the profit earn by the company in proportion of their holdings.
However, investment decision is related to the process of how to make the best allocation
of the capital fund in order to maximize the value of firm along with increase in shareholders
value. Financing decision supports investment decision making process by allocation of funds in
the investment opportunities available (Levy, 2015). It also emphasizes on how the investments
and expenses are to be paid. Companies by making use of the existing current capital fund,
borrowing or by selling equity can meet its fund requirement.

Thus, investment decision is concerned with the process of selecting appropriate asset
type either long term as well as short term for making proper allocation of the fund which is
borrowed or made available by the financial managers of the company with the help of financing
decision. When a company decides to make the allocation of its surplus fund in the investment
options available, maximization of firm's and shareholders value is the main motive. If a
company makes allocation of its funds in the best opportunities available, then it can lead to the
growth, acquisition of market share, improves in the performance level of the company.
The company should have an optimum working capital as well as optimum capital
structure which is considered as necessary for the smooth functioning of day to day business
operations and processes. This can be achieved by making sound and effective decision in
respect of investment and financial matters (Morgan, 2015). With the help of good investment
decision, it can make company more competitive and efficient in long run period. The changes
in capital structure could give impact on net income, cost of capital, leverage ratios along with
liabilities of publicly traded firms. In case organization raises find via equity financing, there is
presence of positive item in cash flows through section of financing activities with increment in
common stock at par value of statement of financial position.
For the acquisition of unlisted company shares by AB plc., company has to make sound
and strong investment as well as financing decision. This decision can be made by making
effective investment strategies and plans with the available financing sources of AB plc. Thus,
AB plc. Can make use of available external sources of funding for acquiring shares such as
Debentures, Bank loan etc. The company can make investment decision by making proper assets
allocation as it has major impact on the financial goals and objectives the company. For
acquiring shares of an unlisted company, AB plc. has to either borrow funds or has to take
financial assistance from the banking and other financial institutions. It has been assumed by
WACC to current capital to discount free cash flows, and at start point it is assumes that project
is wholly funded through equity. Generally, this is calculated through undertaking equity bet and
dividing it to 1 along with adjusted debt to equity. Thus, Unlevered beta is known as measure of
risk of organisation relative to specific market.
AB plc. can purchase the shares of unlisted company with the amount borrowed from
bank or from other financial institutions. A good financing decision can lead to profit making

from the investment made. The financial managers of company plays an important role in
making and supporting of the investment decision, financing decision and the profit distribution
decision. They help in making balancing between the amount of cash inflows and the amount of
cash outflows of the company from which the liquidity position of the company can be further
determined. AB plc. Should diversify the investment fund available for eliminating the risk
factor associated.
AB plc. should manage the working capital of the company. As working capital
management is considered as an important source for the smooth functioning of every business
organisation (Nayyar, 2015). Proper and effective management of working capital helps in
meeting the day to day business expenses or in meeting any short term obligations of the
business which is going to arise in the near future time period. With proper working capital
management, it will help AB plc. in remaining liquid and solvent throughout the year. WACC is
used as applied discount rate for future cash flows for purpose of deriving net present value of
business. It could be used as hurdle rate against which helps in assessing ROIC performance. It
reflects minimum rate of return at which organization generates value for investors as this serves
as useful check with investors perspective.
AB plc should have an optimal capital structure for its company. The term Capital
structure is defined as the mix of long term capital and the debt resources of the company. It is
considered as the process of financing the overall business assets and operations through
different best possible combination of the available equity, debt, or hybrid securities with the
company. A company should have an optimal capital structure by maximizing the value of
shares and minimizing the cost of capital. AB plc at the time of acquiring shares of the unlisted
company should ensures that the cost of acquiring the business is not more than the value of that
company. For a company to run its business operations in a profitable manner, it is very
important to have minimum cost of conducting business operations, cost of production and other
cost related expenses.
At the time of acquisition of shares of unlisted company, AB plc. Should ensures that
compliances of all laws and regulations has been done which is applicable for these transactions
as per the provisions of the Companies Act. After acquiring or purchasing of unlisted company
shares, AB plc being a listed company should get the new shares also listed on the stock

exchange where AB plc shares are being listed earlier. AB plc should also make changes in its
Article of Association and Memorandum of Association. Also, the company should make
changes in the Authorised share capital of the company (Chen, Harford and Kamara, 2019). The
company should informs about such acquisition of shares to its shareholders and other
stakeholder of the company by giving a notice. The company should also disclose about the
acquisition of shares of unlisted company in its financial statements and financial as well as the
annual report prepared for specified accounting year as this information helps and affects the
investment related decision making process of its shareholders and stakeholders.
The recommendations on basis of AB Plc that, it must have optimal working capital
structure which helps in smooth functioning of regular operations of business and process. It
should purchase share of unlisted organization with borrowed amount through ban and other
financial institutions. Further, it must diversify its available investment fund to substitute
associated risk and there should be effective and proper management of working capital.
Simultaneously, this should ensure that acquiring cost of business should not be more than value
of organization. It has been recommended that compliance of laws and regulations has been
performed which is important for transactions according to provisions of companies act. Lastly,
there must be full disclosure related to acquisition of shares of unlisted organization in financial
statements as this will impact for process of decision making regarding investment to
stakeholders and shareholders.
CONCLUSION
By summing up this report, it has been concluded that AB plc can use bank loan, venture
capitalist, shares and debentures for fulfilling monetary requirements on external basis. The
report has discussed debt financing methods including bank loan, debentures for meeting its
funds requirements. With the help of borrowed funds, AB plc can acquire the shares of unlisted
company as it is less risky source of funding option available for company. Sukuk source of
funding is also considered a good option as it works on the principle and guidelines of Shariah,
Islamic Religious Law. Sukuk offers stake in actual investment instead of interest rate.
Therefore, Sukuk can also be considered as it takes into account the risk profile of its investors.

It can be seen in the report that by issuing debentures and taking loan from banking units,
company gets benefited in tax brackets. Further, the company is advised to lay focus on raising
funds from that source which brings leverage in the business operations.
REFERENCES
Books and Journals
Ashrafi, K., 2015. Islamic finance product structuring through Islamic securitization markets.
Chen, Z., Harford, J. and Kamara, A., 2019. Operating Leverage, Profitability, and Capital
Structure. Journal of Financial and Quantitative Analysis. 54(1). pp.369-392.
Drover, W., and et.al., 2017. A review and road map of entrepreneurial equity financing
research: venture capital, corporate venture capital, angel investment, crowdfunding, and
accelerators. Journal of Management. 43(6). pp.1820-1853.
Klein, P. O. and Weill, L., 2016. Why do companies issue sukuk?. Review of Financial
Economics. 31. pp.26-33.

Levy, H., 2015. Stochastic dominance: Investment decision making under uncertainty. Springer.
Morgan, R., 2015. The Difference between the Acquisition of Rights and the Quantification of
Shares of Co-Ownership Interests in Land. Exeter Student L. Rev..1. p.35.
Munari, F., Sobrero, M. and Toschi, L., 2018. The university as a venture capitalist? Gap
funding instruments for technology transfer. Technological Forecasting and Social Change.
127. pp.70-84.
Nayyar, S., 2015. The New Scope of Debentures Under the Companies Act, 2013: Does It Cover
Commercial Paper. NUALS LJ. 9. p.229.
Park, S., Li Puma, J. A. and Prange, C., 2015. Venture capitalist and entrepreneur knowledge of
new venture internationalization: A review of knowledge components. International Small
Business Journal.33(8). pp.901-928.
Peráček, T., and et.al., 2018. Simple Company on Shares as Startup Support Tool. Acta
Universitatis Agriculturae et Silviculturae Mendelianae Brunensis. 66(6). pp.1601-1611.
Sun, J., and et.al., 2016. Ownership, capital structure and financing decision: evidence from the
UK. The British Accounting Review. 48(4). pp.448-463.
Vassallo, M., 2017. Preference shares, their canons of construction and their similarities with
debentures: a comparative analysis (Bachelor's thesis, University of Malta).
Online
Overview of sources of financing. 2018. [Online]. Available through:
<https://www.kmu.admin.ch/kmu/en/home/concrete-know-how/finances/financing.html>.
Financial Analysis. 2018. [Online]. Available through:
<http://www.itbmsindia.com/course/financial-analysis/>.
Factors determining debt and equity choices of a firm in Kenya. 2019. [Online]. Available
through:
<https://www.academia.edu/14570738/FACTORS_DETERMINING_DEBT_AND_EQUITY_C
HOICES_OF_A_FIRM_IN_KENYA >.