Financial Analysis and Management (Part 2)

FINANCIAL ANALYSIS
AND MANAGEMENT
(PART 2)
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Critically evaluation of five external source of finance which are available for a public listed
business entity..............................................................................................................................3
Explaining considerations which are must taken by the firm at the time of selecting financing
source...........................................................................................................................................7
TASK 2............................................................................................................................................9
Explanation of Weighted Average Cost of Capital (WACC)......................................................9
Critically evaluating influence of long term financing sources on WACC...............................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
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INTRODUCTION
At the working environment of any business finance is as a backbone which supports to
stand and exists in the market or industry. Apart from this, when an entrepreneur going to expand
its business at the other market then also it requires fund or capital which provided by the variety
of financing sources. In the current study different types of sources for raining fund which are
available for public listed entities are critically evaluated with the merits and limitations both.
Further, it shows those information which requires for the public company while choosing a
source of finance. In the second part of the present study Weighted Average Cost of Capital is
explained along with impact of long term financing sources on it.
TASK 1
Critically evaluation of five external source of finance which are available for a public listed
business entity
When any firm make plan to expand business in new market then very key necessary
which require is such as financial resources because without this the management not able to
enter in the other market. In this condition in there are variety of external as well as internal
sources by which the management of public listed company able to raise fund and then can easily
enter in agreed and expected market (Michalski, 2012). In context to this for public listed firm
there are different external source of finance are available which elaborated along with benefits
and limitations are as below:
1. Equity financing
It is the most widely used and adopted financing source for the public listed entities while
enhancing fund in the business. It is a source in which the company issue its shares and stock in
the market using IPO and FPO. Further, the shares are purchased by the shareholders and the
sum of money is to be used in firm for expand and any other business purposes. Some
advantages and disadvantages of equity financing are as below:
Advantages:
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 It takes very less cost of finance which not affects to the profitability ratio and margin
condition in the industry of operating. Further, dividend amount is given to the potential
shareholders on the money invested in shares but if the firm has positive and better profit.
 While raising capital on the basis of such financing source the public companies not need
to repay any kind of payments which is the major benefit of it (Lord and et.al., 2013).
 If talking about the risk factor then there is lower risk in the equity financing as compare
to all the available source of fiancé at external level.
Disadvantages:
 Equity financing is a time consuming process while issuing shares in the market. Along
with this it is compulsory to listing in the stock market if the firm wish to raise from
equity. Further, listing process in stock market is also long and wide which takes more
time.
 In equity financing the shareholders become a part of the business and they have right to
interfere in business decision making process. Hence, the company loss power to make
effectual business decisions because of involving the stockholders in some business
meetings (Flood, Mendelowitz and Nichols, 2013).
 It is highly compulsory to fulfill all the legal and regulatory compliances which are
impose by the stock market on the public listed firm.
2. Bank loan
Other financing source which is available and suitable for public type of firms is bank
loan in which the company takes amount from the commercial banks. While taking capital from
bank it imposes interest charges on firm as a cost of finance. Further, bank loan is a medium or
long terms source of finance which has some limitations and benefits which are expressed as
below:
Benefits:
 Very key benefit of the bank loan is that it provides tax deductable services along with
effectual financial plan against of paying the interest amount and charges by the public
firm which lead to increase profit.
 Apart from this, process of raising capital through the bank loan source is easy and of the
very short term.
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