Evaluation of Different Sources of External Finance and Impact on WACC

This study evaluates the different sources of external finance available to a public listed corporation and examines the impact of these sources on the Weighted Average Cost of Capital (WACC). The study focuses on Top Glove Corporation Bhd, Malaysia's leading rubber glove manufacturer, and provides an overview of the company. It discusses the evaluation of equity financing, debenture issue, term loans, preferred stock, and venture capital as external sources of finance. Additionally, the study explains the concept of WACC and evaluates the view that WACC is impacted by long-term sources of finance.

Financial Management

Table of Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Overview of company:.................................................................................................................3
A. Evaluation of different sources of external finance which are available to a public listed
corporation:..................................................................................................................................4
B. Explanation of term WACC or Weighted Average Cost of Capital and evaluation of view
that WACC is impacted by long-term sources:...........................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management in any company is a crucial operation. This is planning,
organizing, tracking and screening of fiscal capital/resources in order to meet strategic aims. This
is an excellent procedure for monitoring a corporation's financial affairs, like fundraising, use of
resources, reporting, payouts, risk assessments and everything else that has to do with funds.
Financial management is the implementation of particular management ideals to a company's
financial assets. Proper financial management offers performance boost and scheduled tasks to
ensure effective operation. If a business is not managed appropriately, it'll face obstacles that can
significantly affect its success and progress, so managers in company apply financial
management structure (Shapiro and Hanouna, 2019).
The study evaluates distinct sources of external finance in context of public listed
corporation named “Top Glove Corporation Bhd”. Company is Malaysia's leading rubber glove
manufacturer. Study further involves comprehensive explanation about WACC (weighted
average cost of capital) as to what extent it is affected by long term finance sources employed.
TASK
Overview of company:
Top Glove Corporation Bhd is world's biggest glove maker. Which only began as local
commercial corporation with 1 manufacturing unit and One glove production unit now gained
26% of rubber glove market share worldwide. The firm has production processes in Malaysia,
Thailand and China. Company also has merchandising branches in those nations and in USA,
Germany and Brazil. It exports to around more than 2,000 clients globally in 195 nations.
Company officially listed in year 2001 on Malaysian Bourse and in year 2016 on Mainboard of
Singapore Exchange. Top Glove has shown consistent growth over past Eighteen years with an
average percentage growth rate (CAGR) of round 21.7 per cent for sales and 19 per cent for
income after tax. Top Glove strives to manufacture reliable, secure and low-cost gloves in
accordance with its time apparently-tested business management, thanks to its around 18,000
current employees. Top Glove is not only looking after its laurel, but it is also looking forward to
dramatically increasing its share of the global marketplace by 30% by the year end of 2020
(About Us: Top Glove Corporation Bhd. 2019).

A. Evaluation of different sources of external finance which are available to a public listed
corporation:
Funds are basic requirement of every business and commercial enterprise, thus
arrangement of funds is critical task for business managers. For arrangement of funds, business
managers should evaluate the sources of funds as different sources of funds have different
impacts on business capital and fund structure. By using the incorrect source, the cost of funds
tends to increase, that in turn directly affects the financial viability of business operation.
Improper correspondence of capital form with commercial requirements could conflict with
smooth working of the company (Karadag, 2015). for instance, When fixed assets that receive
benefits after two years have been funded via short-term finances, after 1 year, cash flow
incompatibility will be created and the manager has to search once more for finances as well as
to pay the expenditures to raise capital once more. Following is discussion on considerations to
take into account for selecting type of financing:
In context of Top Glove Corporation Bhd, board of directors should consider the funding
required, purpose of raising funds whether for long term or short term, duration for which funds
are required and current level of gearing in business. Moreover, directors may take into account
existing reserve funds, sources available for funding as per nature and size and impact of funding
source on business's stability (Parker, 2012).
External sources of finance can be defined as venues/places to collect funds from outside
an organization. External sources of funding could include the merger/acquisition of new
company associates or the issuance of lengthy-term debt capital or bonds, or corporate debt
papers. In this context here are several major external sources of finance that are available to
listed public corporation like Top Glove Corporation Bhd, as explained below:
1. Equity Financing: Equity funding is the way the selling of securities to raises funds. Equity
funding is subject to regulations that are enforced in certain jurisdictions by any local or national
securities regulator. This legislation is intended primarily to safeguard the investment public
against unethical traders who may receive funds from unwitting shareholders and vanish from
financing. Accordingly, equity funding is often followed by a proposal called memorandum or
prospectus containing detailed information which should enable the investor to make an
informed decision on benefits of the funding. The report or prospectus must state the functions of

the corporation, the details of its managers and employees, the utilization of the funds, the risk
considerations and financial reports (Pham, Yap and Dowling, 2012).
The greatest benefit of equity financing is that capital obtained through this is not
expected to be returned. Obviously a top management in corporation want to stay profitable and
offer a decent yield on their investments to equity holders but without any payments or interest
costs as in case for debt financing. Equity financing doesn't really place any further financial
strain on company. As no periodical payments connected with equity funding are needed, the
corporation has much more capital accessible to spend in growing business. However, it doesn't
imply equity financing doesn't have drawback.
The drawback is quite high indeed. Company need to deliver the investor a proportion of
share in company ownership to achieve funding. Company need to split earnings and
communicate with new shareholders as to make the corporation's decisions. The only option to
get rid of investors is to purchase them out, however that'll probably be more costly than funds
they given initially (Jiang, Zhu and Huang, 2013).
2. Debenture Issue: Debentures are one popular form of funding used by listed public
corporations that favour debt over equities. Debt is regarded the cheaper than equity form of
financing. It isn't sharing influence with investors since interests payments to debenture holders
is exempt from taxes. Remaining procedures of debenture issue is quite similar to process of
equity issue. This is given to the general public as well as the relevant regulation also has to be
comply with. Debentures may require some issuance expenses and that some of the corporation's
assets are collateralised.
Debenture refers to debt instrument/means unsecured via collateral. Because debentures
not require collateral backing, these must depends on corporation's goodwill in market and
creditworthiness for support. Public limited Corporations like Top Glove also prefer to employ
debentures as long-term debts, since debentures are unsecured. Alternatively, they have
protection of only underlying company's fiscal stability and solvency. Such debt instruments
charge interest rates and can be exchanged or repaid at fixed date. Such planned debt interest
costs are usually made by a corporation until they offer shareholder dividends. For corporations,
debentures are beneficial as they hold lesser interest rates as well as lengthier repayment dates
than other forms of loans or financial instruments (Dudin, Lyasnikov, Yahyaev and Kuznecov,
2014).

3. Term Loan: The features of term loan are quite identical to debentures issue except that it
doesn't require too much redemption expense since some banking or institutions offer it. It does
not involve common public. bank does a thorough review of financial statements of corporation
and potential strategies to assess the corporation's debt servicing ability. These kind of loans are
secured by corporation's assets. A term loan holds two kind of interest rate either fixed or
variable based upon benchmark rate. When loan proceeds are utilized to fund the purchasing of
asset it may affect repayment schedule by useful life of such a asset. For minimize risk of
defaults or inability for meet payment, loan needs collateral as well as a stringent approval
procedure. Term loans, furthermore, usually carry no punishments when they are reimbursed out
in advance of schedule (Sharan, 2012).
4. Preferred Stock: Features of both equity stocks and debts are exists in preferred stock shares.
These are considered preferred since, at the point of liquidation, these also have preference over
common stock securities in lieu of dividend and capital Specific type of preferred stock named
cumulative preferential shares has accrued their dividend until they are not compensated. These
dividend payments may be postponed but could not be neglected. The phrase "stock" relates to a
company's ownership or equity-fund. Two kinds of equities: common stock and preferred stock-
exist. Preferred shareholders have a greater claim to dividend-payments or distribution of assets
than common shareholders. Details of every preferred-stock relies on issue. Here, preferred
shareholders holds more priority over the holder of common stocks in case of dividends
payments, that mostly yield/return more in case of common stock as well as may be encashed
quarterly/monthly. Such dividends may be fixed or based upon benchmark rate such as the
LIBOR. In issuing summary, and often cited as percent. Adjustable-rate securities identify other
factors affecting yield of dividends, while participating shares may pay extra dividends which are
determined in lieu of common stock dividends or income of the business (Hendriks, 2013).
5. Venture Capital: This is similar to stock shares besides the investors are different set of
individuals. Who are Normally called venture capitalists, these individual or firms usually spend
funds as investment in new corporation at an stater level and conducts a strict evaluation of
corporation before making investments. In venture capital agreement, a corporation's huge parts
of ownership are made and distributed to some investors by separate, limited partnerships formed
by venture capital organizations. Sometimes those alliances are made up of a group of few
similar-business companies (Winand, Zintz and Scheerder, 2012).

B. Explanation of term WACC or Weighted Average Cost of Capital and evaluation of view that
WACC is impacted by long-term sources:
WACC: Capital finance for a business consists of two elements: debt and equity. Borrowers and
shareholders deserve certain return on funds or investments they have made available. The
capital cost is the anticipated return on equity investors / shareholders and bond holders; thus,
WACC informs the return which both stakeholders should anticipate. WACC reflects an
opportunity cost to investor to take on threat of bringing capital into a business. To grasp
WACC, consider of a business as a money bag. There are two key-sources of funds in bag: debt
and equity-capital. Funds generated via business-operations is not third source, since the cash
remaining after paying debts is not distributed to share-holders in form of dividend-payments,
but is held in bag on their side. In case debt holders expect a return of 10 percent on the
investment while shareholders expect a yield of 20 percent, then on-average, bag-funded projects
would have to yield 15 percent to satisfy both stakeholders holders. This 15 percent yield is
determined as WACC (Jain, Singh and Yadav, 2013).
Securities analysts use WACC while evaluating investments and choosing them. Under,
discounted cash-flows analysis, for e.g, a WACC is being used as discount rate adhered to
potential cash-flows to derive net present value with respect to a company. WACC could be
employed to test ROIC efficiency as a barrier factor. It also performs a central role in calculating
company's economic value added (EVA). A corporation commonly use WACC as just a hurdle
rate for the purpose of mergers and acquisitions (M&A) evaluation, and also for internal capital
financial data analysis. When investment opportunity does have a reduced Internal Rate of
Return (IRR) than investment's WACC, rather than investments in project, this should be buy
back its own securities or pay dividends. Following is the equation/formula for assessment of
WACC, as follows:
As shown below, the WACC formula is:
WACC = [E / V * Re(%) ] + [ (D / V * Rd(%) ] x (1 – tax rate(%) ]
Under this formula terms used are explained below:
E = market value of the corporation’s equity (market cap)
D = market value of the corporation's debt
V = total value of capital (equity + debt)

E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate
A long interpretation of above WACC formula-expression is presented below, that also involves
cost of Preferred Stock.
WACC = Cost of Equity x Equity(%) + Cost of Debt x Debt(%)(1 – tax rate) + cost of preferred
stock x preferred stock(%)
WACC's aim is to assess the expense of each component of corporation's capital structure
depending on equity, debts, and preferred stocks that it has. Every part has an enterprise cost
Corporation pays its debts at fixed interest rate, as well as its preferred stocks at fixed yield. and
if a company does not offer a fixed yield on common stock, it often pays the equity-holders
dividends in form of cash. Here are some major components of WACC which will help to obtain
better understanding of topic, as follows:
Cost of Equity: This may a tricky thing to compute cost of equity as share capital value not
holds any explicit cost. As compare to debts, equity doesn't hold any concrete price which
corporation required to pay. Although, this doesn't implies that no any other amount of cost in
equity actually exists. Equity holders ordinarily anticipate a definite return on equities
investment made by them in corporation. Required return rate of equity holders is sometimes
regarded a cost, since shareholders can sold their holdings when the corporation fails to deliver
the anticipated return (Jalbert, Jalbert and Furumo, 2013). The share-price may go down as a
result. Essentially, cost of equity is just what it charges the firm to retain a stock price which is
acceptable to shareholders. A universal method of assessing cost of equity is CAPM which is
termed as capital asset pricing model. Here is the formula for computation of cost of equity, as
follows:
Re = Rf + β (Rm − Rf)
Here in above-presented formula following is the full terms of expression:
Re = Cost of Equity through CAPM
Rf = Risk free rate
β = Beta

Rm = Market rate
Risk Free rate of Return = This is the value derived by investments in bonds called free of credit
risks, such as governmental bonds.
(ß)Beta: It tests how much share price of a corporation responds against the entire market. For
example beta of 1, means the business is going in line with market-trend. In case beta is greater
than 1 share/security exaggerates the fluctuations of the market; less than 1 indicates that the
share is more secure. An company can sometimes have a negative rating. which implies that
share price fluctuates with opposite way to wide market.
(Rm – Rf)Equity Market Risk Premium: The equity market risk premium (EMRP) is the rewards
that investors receive in returns for trading in stock market above and beyond risk-free limit. In
other terms, the gap between risk-free pricing and market rate is the same. It is an extremely
contentious number. Some say it's risen because of the fact that holding shares has become more
dangerous (Singh and Wheeler, 2012).
Cost of Debt: Opposed with cost of equity, percent of cost of debt is relatively simple to
determine. Cost of debt (Rd) ought to be current market rate that the company pays on its debts.
When company does not use market rates the business will consider an acceptable market rate
due. Since corporations benefit from tax deductions provided for interest charged, net cost of
loan is interest paid less any tax savings derived from provision of tax exempt interest. After-tax
burden of the debts is therefore Rd (1- corporate tax rate).
Impact of Long term sources of Finance on WACC:
In WACC, equity and debts both are used to define corporation's overall capital structure.
Here notable thing is that debts used in computation of WACC are long term debts which is long
term source of finance while on other side, Equity funds of company is also regarded as long
term source of finance. This fact is evidence that computation of WACC is wholly depends on
long-term finance sources. The weighted average capital cost (WACC) evaluates the aggregate
capital cost to an organization. When the cost of debts is not equivalent to cost of equity, a shift
of entire capital structure affects the WACC. Generally, equity costs are greater than debt costs,
so increased equity financing normally increases WACC. Thus any change in debt and equity
directly affects the corporation's WACC.

CONCLUSION
From above study it has been articulated that financial management is indeed a essential
task for corporations specially for public limited company such as Top Glove Corporation, as in
this company common public holds shares. Financial management enables top management to
assess the need of funding in business and also supports the decision of choosing appropriate
funding source. Moreover, WACC is useful for both stakeholders and corporation itself as it
provides a clear view of corporation's capital structure.

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Online:
About Us: Top Glove Corporation Bhd. 2019. [Online]. Available through
<https://www.topglove.com/corporate-profile/>