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Short Term and Long Term Sources of Fund : Report

   

Added on  2020-01-15

24 Pages8520 Words162 Views
MANAGING FINANCERESOURCE DECISION

TABLE OF CONTENTS1. INTRODUCTION..................................................................................................................12. Sources of finance..................................................................................................................1AC 2.1 Type of businesses................................................................................................1AC 2.2 sources available to business................................................................................1AC 2.3 Comparison between rights issue and loan stocks...............................................3AC 2.3.1 Rights Issue.......................................................................................................3AC 2.3.2 Loan Stock.........................................................................................................3AC 2.3.3 Comparison.......................................................................................................3AC 2.4 Beneficial source of finance for the Buildings and noncurrent assets.................3AC 2.5 Advice to the Board of Directors on finance source for working capital.............4AC 2.5.1 Definition of working capital ...........................................................................4AC 2.5.2 Importance of working capital..........................................................................4AC 2.5.3 Sources available for working capital...............................................................43. Financial statements...............................................................................................................5AC 3.1 Statement of profits or loss...................................................................................5AC 3.2 Statement of financial position.............................................................................5AC 3.3 statement of cash flow..........................................................................................5AC 3.4 Impact on financial statements.............................................................................5AC 3.4.2 Gearing ratio......................................................................................................7AC 3.4.3 Impact of the financial plans on the financial statements.................................7AC 3.5 Calculation of EPS...............................................................................................7AC 3.5.1 Information........................................................................................................7AC 3.5.2 Calculation of EPS............................................................................................7AC 3.5.3 Explanation........................................................................................................8TasK 4 INVEstment Appraisal...................................................................................................8AC 4.1 Investment appraisal importance..........................................................................8AC 4.2 Risk to future cash flows and future values vs. present value..............................8AC 4.3 Types of techniques..............................................................................................9AC 4.3.1 Pay back period.................................................................................................9AC 4.3.2 Calculation and explanation of pay back period...............................................9AC 4.3.3 Net present value...............................................................................................9AC 4.3.4 Calculation and explanation of net present value...........................................10

AC 4.4 Recommendation for the investment opportunity..............................................10AC 4.5 Unit cost.............................................................................................................11AC 4.5.1 Importance of cost per unit and its calculation................................................11AC 4.6 Factors to be considered while deciding the selling prices................................11TASK 5 CASH FLOW VS. Profits..........................................................................................12AC 5.1 Need of cash budget and trends of the Taste business budget...........................12AC 5.2 Importance of financial planning.......................................................................13AC 5.3 Liquidity problems with having proper availability of profits...........................13AC 5.4 Users of the accounts..........................................................................................14AC 5.4.1 Users................................................................................................................14AC 5.4.2 Information need and importance....................................................................14TASK 6 Interpretation of financial statements.........................................................................14AC 6.1 Ratio Analysis....................................................................................................14AC 6.1.1 Profitability ratio.............................................................................................15AC 6.1.2 Liquidity ratio..................................................................................................15AC 6.2 Advice to the Taste Business..............................................................................16TASK 7 Financial statements of sole trader, partnership and limited companies...................16Conclusion................................................................................................................................17REFERENCES.........................................................................................................................18

INDEX OF TABLESTable 1: Calculation of enterprise value for computing WACC of 5, 00,000 shares................4Table 2: Computation of WACC...............................................................................................4Table 3: Calculation of enterprise value for computing WACC for loan stocks.......................5Table 4: Calculation of WACC..................................................................................................5Table 5: Calculation of enterprise value for computing WACC for stocks and loan................5Table 6: Calculation of WACC.................................................................................................6Table 7: Calculation of EPS.......................................................................................................6Table 8: Calculation of cash flows.............................................................................................8Table 9: Calculation of payback period.....................................................................................8Table 10: Calculation of net present value.................................................................................8

1. INTRODUCTIONManaging financial resources is very important activity for the organization success.Adequate availability and efficient management of finance resources helps business tooperate successfully. There are different sources available to the organizations for fulfillingits finance requirement. Taste is a medium size company that want to expand its cateringbusiness therefore business need finance requirement. Present report will helps us inidentifying the available short term as well as long term fund sources for the businesses. Inaddition to it, organization needs to take decisions for pricing, investment and budgeting.Therefore, the report describes the decision making process so as to take efficient andstrategic decisions. Investment appraisal techniques help the businesses to take effectiveinvestment decisions that yield higher the profits. On contrary, the importance of financialplanning will have been discussed for achieving the organization objectives. Furthermore, thepreparation of financial statements helps companies to determine their operating and financialperformance. Business corporations can take better decisions by analysing and interpretingtheir financial statements. 2. SOURCES OF FINANCEAC 2.1 Type of businessesSole proprietorship: It is the most common form of business. Under this businessorganization, only a single entrepreneur establishes the business hence, all the businessprofits as well as losses are available for themselves.Partnership: Under this form of business organization, two or more individual canstart the business operations. Therefore, all the business profits and losses are share in theirdecided profit loss sharing ratio. Company: It is a legal body that came into existence by following the companies act.Shareholders are the owners of the company who make investment in the business and get thereturn. AC 2.2 sources available to businessIn order to operate successfully business need to have adequate availability ofworking capital. There are distinct sources available for fulfilling short term as well as longterm finance requirement that are explained below:SourcesFeatureAdvantage DisadvantageShort termBank Overdraft: It is aThe advantage of thisThe disadvantage of1 | P a g e

facility that bank providedto all the businesses. Tastecompany can take bankoverdraft and withdrawalhigher the amount from theBank deposits (Sources offinance. 2010). method is that itmitigates the urgentand immediatefinance requirements.this method is thatbank charges a highrate of interest onoverdraft. Further, theoverdraft facility isprovided up to acertain limit. Short term Lease: It is a hiring processthrough which Taste can usethe assets without having itsownership. The advantage is thatthrough paying onlythe hiring charges,company can use theassets. It does notrequire purchasing theassets. However, the maindisadvantage is thatTaste requires payinginstalment plus theinterest charges it.Thus, it createfinancial burden tothe company. Long term Share capital: Tastecompany can issue bothequity and preference sharesin the market to fulfil itslong term financial need. The advantage is thatTaste company do notneed to pay regularlydividend to theshareholders. Thus, itdoes not createfinancial risk to thebusiness.The disadvantage isthat shareholders havevoting rights throughwhich they cancontrol and managethe businessoperations.Long term Bank loan: It is the majorsource of finance. Thus.Taste company can takelong term loans from bank. The advantage is thatthis is comparativelya linent financesources than equitybecause the interest isallowable expenditurefor tax purpose(Arffa, 2001) Disadvantage is thatTaste businessrequires paying timelythe instalment and theinterest charges onbrowed funds. Long term Debentures: Along with theshare capital, Tastecompany can also issueThe advantage is thatit fulfils the financialrequirement to a greatDisadvantage is that itcreate fixed financialburden to the2 | P a g e

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