Source of Finance in Business : Report

Added on - 21 Jul 2020

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MFRD
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................1TASK 1............................................................................................................................................11.1Sources of finance available to business firms.................................................................11.2Implications of sources of finance....................................................................................21.3Evaluating appropriate source of finance for the firm......................................................4TASK 2............................................................................................................................................42.1 Cost of varied sources of finance...........................................................................................42.2 Importance of financial planning...........................................................................................52.3 Analysis of the information needs of internal and external decision maker..........................52.4 Impact of various sources of finance upon the financial statement.......................................5TASK 3............................................................................................................................................63.1 Analysis of budget and important decisions..........................................................................63.2 Explain the calculation of unit cost and pricing decisions....................................................73.3 Viability of project.................................................................................................................8TASK 4..........................................................................................................................................104.1 Important financial statements prepared by Marks and Spencer.........................................104.2 Comparison of format of financial statemetnts...................................................................11financial statements...................................................................................................................114.3 Ratio analysis.......................................................................................................................15CONCLUSION..............................................................................................................................17Table 1Calculation of Payback period.............................................................................................8Table 2Calculation of ARR.............................................................................................................9Table 3Calculation of NPV.............................................................................................................9Table 4Calculation of IRR...............................................................................................................9
Table 5Ratio analysis of M&S and Tesco.....................................................................................15
INTRODUCTIONFinance is the one of branch of business management that matter a lot for the businessfirm. In the present research study sources of finance are explained and their implications for thefirm are discussed in detail. In middle part of the reprot, cash budget and project evaluation isdone. On the basis of obtained results most profitable project is selected for the business firm. Atend of thre report, ratio analysis is done and on that basis performance of the firm is acessed andfunancial statements are also compared and differentiate in respect to sole trader, partnership andcompany.TASK 11.1Sources of finance available to business firmsThere are number of sources of finance that are available to the business firms. All thesesources of finannce have some merits and demerits. It become inevitable for the firm to ensurethat it is raising funds from appropriate source of finance. Some of the common sources offinance that are available to Marks and Spencer are given below.External source of financeEquity:Equity is commonly used as a source to fund project that required heavy capitalinvestment (Caglayan and Demir, 2014). This source of finance is usually used by thebusiness firms when they want to make huge capital investment in the business toexpand it at rapid pace. Marks and Spencer can issue shares in stock market and caninvest proceed amount to develop its own infrastructure and opening new branches acrossglobe.Debenture:It is a variant of debt and similar to bank loan. Only difference betweendebenture and bank loan is that in case of former one debt is taken from general public atspecific interest rate but in case of latter one financial institute give loan to the businessfirm. large corporates that have good reputation usually issue debentures on whichinvestment is made by the mutual fund and other firms.Bank loan:Bank loan is the commonly available source of finance that is available toMarks and Spencer. Under this simply by mortgaging some property target amount ofloan is raised from financial institute and then same is invested in business. From earnedrevenue principal and interest amount is paid by firm to bank.1|P a g e
Venture capital:Venture capital is the source of finance under which there is a VC firmwhich provide equity to the company and obtain shareholding in same. Due to purchaseof equity these shareholders have right to take part in decision making process. Usuallly,VC firmm charge heavy fee from firm for proving services.Internal source of financeRetained earning:It is another source of finance where portion of revenue is kept asidefor future time period in order to meet business needs. Usually, it is assumed that there isno cost of capital of mentioned source of finance (Irwin and Scott,2010).1.2Implications of sources of financeThere are multiple sources of finance that are available to the business firms. All thesesources of finance have some implications which are described below.Sources offinanceFinancialimplicationsLegalimplicationsDilution ofcontrolLiquidationof companyEquityIn case of equity itis usuallyobserved that costof raising fund isvery high relativeto other sources offinance whichmake it moredearer (Adesua-Lincoln, 2011).In case of equitylegal implicationsare very high as itis inevitable tofollow all rulesand regulationsthat are preparedby regulatorybody beforeissuing shares inthe market.Control getreduced in casefirm issue newshares to theshareholders. Aswith increaase innumber ofshareholderscontrol ofexisting one thefirm get reduced.In casecompany getliquidated itsasset is soldto makepayment tocreditors.Usually,importance isgiven tocreditors thenshareholdersin terms ofpayment.DebentureCost is relativelylow the equity incase of debenture.Necessary tofollow rules andregulations thatare developed byrelevant govrningbody. In case offailure to do somay results innegatueconsequence inbusiness.Control does notget disturbed andit remain samein everysituation.If company iswinding upthen in thatcase first ofall its assetsare sold in themarket and byusing samepayment ismade to thedebentureholders. Ifany amountremain then2|P a g e
same is usedto makepayment toshareholders.Bank loanIn case of bankloanlikedebenture there isloss cost of sourceof finance. Due tothis reason it ispreffered by mostof the businessfirms (Duchin,Ozbas. andSensoy, 2010).In case of bankloan financialinstitutes havetheir own standardthat they followedfor giving loan tothe business firms.As per rules incase if Marks andSpencer failed togiven loan amounton time strictaction can betaken by bankagainst it.Like debenturein case of bankloan also controlremainunchanged.In case ofbank loanfirst of allrelevantamount ispaid to bankand thenremainingproceeds areused to payshareholders.Venture capitalVC firms havehuge control onthe firm and dueto this reasonreceive hugeamount asdividend andseating fee fromthe business firms.Thus, cost ofventure capital isrelatively higherthen equity.Terms andconditions aredetermind by thecompany andventure capitalfirmandaccordingly bothfirms need toperform theiroperations(Embrechts,,Klüppelberg. andMikosch, 2013).Control ofexistingshareholdersheavily getaffected becausenewshareholdersmake purchaseof shares anddue to thisreason they willalso participatein decisionmaking processofanorganization.In case ofliquidationalso after giveamount tocreditorspayment ismade toventurecapital firm.Retained earningOpportunity costis consdiered ascost of retainedearning.There are no legalimplications ofretained earningfor the firm.Control remainunchanged.In case ofliquidation noimplications.1.3Evaluating appropriate source of finance for the firmOut of all these sources of finance equity is considered as one of best alternative becauseby using mentioned source of finance firm can adjust its cost of capital and in case it face loss inbusiness can avoid cost of capital. Debt is not considered as appropriate source because if debt3|P a g e
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