Capital Expenditures & Business Financing

This assignment delves into the crucial aspects of capital expenditures and business financing. It examines various methods for evaluating capital investments, explores different sources of finance for startups and growing businesses, and provides an in-depth look at key financial statements like income statements, balance sheets, and cash flow statements for various business structures (sole trader, partnership, limited company). The assignment also incorporates illustrations to enhance understanding of these concepts.

MANAGING FINANCIAL
RESPOURCES AND DECISION
MAKING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
1.1 Sources of finance available to business ..............................................................................3
1.2 Implications of different source of finance...........................................................................4
1.3 Appropriate source of finance...............................................................................................5
TASK 2............................................................................................................................................5
2.1 Cost of different sources of finance......................................................................................5
2.2 Importance of financial planning for Tesco..........................................................................6
2.3 Information needs of different decision makers....................................................................6
2.4 Impact of finance on the financial statements.......................................................................7
TASK 3............................................................................................................................................7
3.1 Analysis of budget and making appropriate decisions..........................................................7
3.2 Calculation of unit cost.........................................................................................................8
3.3 Project evaluation..................................................................................................................9
TASK 4..........................................................................................................................................11
4.1 Discussion on the main financial statements......................................................................11
4.2 Format of financial statements for different organizations.................................................12
...................................................................................................................................................13
...................................................................................................................................................14
4.3 Ratio analysis......................................................................................................................20
CONCLUSION..............................................................................................................................22
REFERENCES..............................................................................................................................23
INDEX OF TABLES
Table 1: Cash budget for Tesco.......................................................................................................8
Table 2: Calculation of unit cost......................................................................................................9
Table 3: Calculation of payback period method............................................................................10
Table 4: Calculation of ARR.........................................................................................................10
Table 5: Calculation of NPV..........................................................................................................11
Table 6: Calculation of IRR...........................................................................................................11
Table 7: Ratio analysis...................................................................................................................21

ILLUSTRATION INDEX
Illustration 1: Income statement of the company...........................................................................13
Illustration 2: Balance sheet of the company.................................................................................14
Illustration 3: Cash flow statement of the company......................................................................15
Illustration 4: Income statement of sole trader..............................................................................16
Illustration 5: Balance sheet of sole trader.....................................................................................17
Illustration 6: Cash flow statement of sole trader..........................................................................18
Illustration 7: Income statement of partnership.............................................................................19
Illustration 8: Balance sheet of the partnership..............................................................................20
Illustration 9: Cash flow statement of partnership.........................................................................21

INTRODUCTION
Finance is a life blood for any organization and no company can survive longer in the
absence of sufficient availability of finance. Tesco is one of the UK largest retail chain stores
that have a 29% market share in the entire industry. In the report Tesco is taken as a company in
order to understand various aspects of finance. In this report, sources of finance are made
available and discussed in detail. After that implication of each and every source of finance are
also described in the report. On the basis of implications appropriate source of finance is selected
for Tesco. Cost of source of finance also plays a key role in selection of source of finance.
Hence, in context to this, cost of each and every source of finance is discussed in the report. In
the middle part of the report cash budget is prepared and movements in the net balance are
described in detail. At the end of the report, project evaluation techniques are applied and ratio
analysis is done in order to evaluate Tesco from different sides.
TASK 1
1.1 Sources of finance available to business
There are many sources of finance that are available to business. Some of these sources
are as follows. Equity- It is a commonly used source of finance and under this, firm brings IPO or FPO
in the market. By bringing same, firm collects fund from the general public. In return,
people those makes investment in company get share in the profit earned by it. By using
this source, of finance cost of finance is controlled by the firms to large extent. Due to
this reason, equity is used by the firms to finance large sized projects. Debt- Tesco is widely used this source to fulfill its fund requirement and finance its
internal as well as external business operations. On the taken loan, firm needs to pay
interest which may be fixed or floating in nature (Davies and Crawford, 2011). If, rate of
interest is fixed then there will be no problem. But, if interest rate is floating in nature
then finance cost of the firm may increase. Hence, Sony Corporation must take loan by
using fixed interest rate. Retained earnings- It is a portion of revenue that remains after paying of all the
expenditures. This is an internal source of finance which does not have any cost of

capital. Due to this reason, this source is widely used by the firms in their business
practice.
 Private equity- This source of finance is a variant of equity under which there is a private
equity firm which is owned a stake in the company and in return provides fund to the
firm (Elliott and Meyer, 2007). These companies purchase at least 60% stake in the
specific company in order to bring themselves in the position to influence company
decisions. This source of finance is used by the firms which are on growth stage and need
finance to accelerate growth rate.
1.2 Implications of different source of finance
Following are the implications of different source of finance. Equity- Like every source of finance, equity also has some merits and demerits. In case
of equity, firm has to pay dividend to the shareholders. However, it is not necessary to
pay dividend every year. However, the rate of dividend is always higher than interest
rate. This is the major demerit of this source of finance. On other hand, issue of shares
lead to the dilution of control in case of existing shareholders in the company (Hillier,
Grinblatt and Titman, 2011). Main advantage of equity is that finance cost is adjustable in
nature. So, it can be said that this source of finance has advantages and disadvantages and
companies by considering their internal factors must select an appropriate source of
finance. Debt- In case of debt, there is a fixed or floating finance cost but ownership of the firm
remains same in the single hand. In order to take loan, firm needs to fulfill some criteria
and require doing some paper formalities. Firms often take debt to finance their
operations instead of issuing shares. Retained earnings- There are no legal implications included in this source of finance.
Companies as per their requirements can use retained earnings. Apart from this, use of
retained earnings does not lead to dilution of control in the firm (Lin and Sun, 2006).
Hence, it can be said that this source of finance does not have any negative point.
 Private equity – In order to use this source of finance, company needs to fulfill some
criteria and after that it can enter into agreement with the private equity firm. Under this
source of finance, control of the existing shareholders gets diluted that is the major

implication of this source of finance. Private equity firm holds a majority of stake in the
company. However, companies must use carefully this source of finance.
1.3 Appropriate source of finance
In order to select an appropriate source of finance, it is necessary to understand the
company’s current position. Apart from this, managers also need to evaluate advantages and
disadvantages of each and every source of finance. Manager can select an appropriate source of
finance only when he analyzes company’s condition in a proper manner and identify positive and
negative points of all source of finance (Ge and McVay, 2005). On the basis of evaluating all the
sources of finance, equity and debt are selected for the firm. If, Tesco invests its entire project by
using single source of finance then it will have to face lot of problems. If, debt alone is take to
finance the project then there will be heavy finance cost which may elevate in case loan is taken
at the floating interest rate. On other hand, if shares are used to finance company’s operations
then control of the existing shareholders will get diluted. Hence, it will be better to use both the
sources of finance for financing project. Tesco cannot use private equity in order to finance its
project. This is because if, this will be done then private equity firm will purchase majority of
shares of the company and this in turn will affect day to day company’s operations (Cooper,
Seiford and Tone, 2007). Using only retained earnings is not sufficient to finance the firm’s
operations. It can be used to meet working capital needs of the company. Due to this reason, debt
and equity are considered as the appropriate sources of finance for the firm.
TASK 2
2.1 Cost of different sources of finance
Cost of different sources of finance is as follows. Equity- Dividend paid on issued shares and share issue expenses are the cost of the
equity as a source of finance. Determination of dividend rate depends on the top
management of company. Hence, it can be said that cost of this source of finance is
adjustable in nature. Debt- Interest paid on debt taken by firm is the cost of this source of finance. Interest is
charged at a certain percentage. This percentage may be fixed or floating in nature (Hill,
Leitch and Harrison, 2006). It depends on the firm that which option which it select while
taking a loan from the bank. Cost of this source of finance is adjustable in nature only in

case of floating interest rate. But, sometimes in case of floating interest rate, finance cost
may also increase. Hence, Tesco managers must consider lot of factors while taking loan
at the specific interest rate.
 Retained earnings- There is no cost of this source of finance because retained earnings is
a part of revenue that is earned by the firm (Love, Preve and Sarria-Allende, 2007).
Hence, Tesco must try to make possible use of retained earnings for the benefit of firm.
2.2 Importance of financial planning for Tesco
Money is a scarce resource and it is responsibility of the firm managers to make sure that
this resource is used in efficient and effective manner. In financial planning a plan is prepared
which will be followed in order to allocate entire available amount among several activities of
the firm. In order to prepare a good financial plan Tesco needs to identify the activities for which
it needs finance. These activities may be investment in derivatives, financing project and
company operations. Firm will look at the importance of these factors and accordingly will
allocate entire budget amount these activities. Under financial planning Tesco will also prepare a
plan about the way in which it will make an investment in the derivative instruments like
forward, future and options (Lewellen, 2004). This helps firm in making sure that allocated
amount will be invested wisely among all derivative contracts. Hence, it can be said that
financial planning play a very active role in making best use of funds and Tesco must do
financial planning in proper manner.
2.3 Information needs of different decision makers
Following are the different decision makers that needs company information. Managers- These are those who manage an organization by working at the top and
middle level of the management. These take day to day business decisions of the Tesco
and put efforts in order to enhance sale of the company product. Managers needs
company financial statements like income statement and balance sheet in order to identify
firm current business position (Nicholson and Aman, 2012). On the basis of analysis of
these statements managers identify a direction in which they need to work out. Thus, it
can be said that company financial statements are the major information need of the
managers. Creditors- These are those who lend money to the Tesco. They needs company financial
statements in order to identify company current financial position. By doing ratio analysis

creditors identify the position where company currently stands (Ogayar and Vidal, 2009).
By using relevant ratios creditors identify the extent to which Tesco can pay its loan
amount on time.
 Government- Tesco pay a tax to the government and latter entity is always interested in
the firm financial statements in order to make sure that it pay accurate amount of tax to
the itself. Hence, government as a stakeholder also needs company financial statements.
2.4 Impact of finance on the financial statements
Finance to large extent affects firm financial statements. Even company raise finance by
using debt or equity in both case changes will be observed in the financial statements of the firm.
If Tesco takes a debt of 50,000 then its long term liability will increase. This means that its
liability side will increase in the balance sheet. On taking a loan firm is getting cash and due to
this reason cash section in current assets of the asset side of the balance sheet will increase. It can
be said that if firm take a loan then both assets and liability side of the balance sheet will
increase. On other hand, suppose firm issue share of 1, 00,000 then shareholder equity in the
liability side of the balance sheet will increase (Obst, Graham and Christie, 2007). This amount
will be added in the called up capital part of the shareholder equity. On issue of shares firm is
receiving cash in large amount. Due to this reason, bank amount in the asset side of the balance
sheet will get increased. Hence, it can be said that finance affects financial statements of the
firm.
TASK 3
3.1 Analysis of budget and making appropriate decisions
Table 1: Cash budget for Tesco
January February March April
Opening balance 7700 12600 7800
Sales 10500 18000 23000 26000
Total 10500 25700 35600 33800
Expense
Purchase 1100 1200 1600 2000

Salary 1700 1900 2200 2300
CAPEX 0 0 10000 0
Creditors 0 10000 14000 13000
Total 2800 13100 27800 17300
Net balance 7700 12600 7800 16500
Interpretation
On analysis of facts it can be seen that net balance of the firm is fluctuating continuously.
In January month net balance was 7700 but in February month this balance increased to 12,600.
This reflects that good increase is seen in case of firm net balance. This happens because firm
take makes a sale of 18,000 which was much higher relative to previous month. But in the month
of March this balance reduced to 7,800 and this happens because capital expenditures were made
and amount was paid to the creditors. In the month of April again net balance increased because
less payment was to the creditors in this month. This indicates that firm is following a cautious
approach and it does not want to keep a debt amount in its balance sheet for long time.
3.2 Calculation of unit cost
Cost plays a key role in success and failure of any organization. By reducing cost firm
can generate economies of scale in its business. Production cost can be classified in to several
categories like fixed cost, variable cost and semi variable cost. Fixed cost is a cost that never gets
changed during life time of the firm. But by increasing number of units produced proportion of
fixed cost to per unit cost can be reduced (Maxymuk, 2000). On the other hand, there is a
variable cost which keeps on changing continuously. With change in production units’ variable
cost also get changed. Last cost is semi variable cost who’s some portion is the fixed and some
part is variable. In other words it can be said that this cost is a combination of both fixed and
variable cost.
Table 2: Calculation of unit cost
Transportation cost 36000
Raw material cost 12000

Labor cost 258000
Total cost 306000
Unit produced 26000
Per unit value 11.76
Per unit cost of the product is 11.76 and this is calculated by dividing all expenses
addition value by the number of units that firm produced in the specific duration.
3.3 Project evaluation
Table 3: Calculation of payback period method
Project A Project B
Initial
investment -60000 -60000
1 20000 -40000 24000 -36000
2 25000 -15000 30000 -6000
3 30000 15000 37000 31000
4 37000 52000 40000 71000
Interpretation
Pay back period indicate the time period within which project recover investment
amount. Both projects are recovering investment amount in two years. Hence, none of the project
can be considered viable on the basis of results of this parameter.
Table 4: Calculation of ARR
Project A Project B
Initial
investment 60000 60000
1 20000 24000

2 25000 30000
3 30000 37000
4 37000 40000
Total 112000 131000
Average 28000 26200
ARR 46.67 43.67
Interpretation
ARR indicate the average return that a project can earn on the invested value (Methods of
project evaluation. 2015). ARR of the project A is 47.67%. Whereas, same of project B is
43.67%. Hence, it can be said that project B is viable then project A on the basis of results of this
parameter.
Table 5: Calculation of NPV
Project A Pv @10% Present value Project B PV @10%
Present
value
Initial
investment 60000 60000
1 20000 0.909 18180 24000 0.909 21816
2 25000 0.826 20650 30000 0.826 24780
3 30000 0.751 22530 37000 0.751 27787.0
4 37000 0.683 25271 40000 0.683 27320.0
Total 86631 101703
NPV 26631 41703
Interpretation
NPV indicate the present value of the project that remains after deducting initial
investment value from the present value of the cash flows. NPV of the first project is 26,631 and

some of the second project is 41,703. Thus, on the basis of this project evaluation parameter
project B is again considered viable for the firm.
Table 6: Calculation of IRR
Project A Project B
Initial
investment -60000 -60000
1 20000 24000
2 25000 30000
3 30000 37000
4 37000 40000
IRR 27.10% 36.26%
Interpretation
IRR indicate the actual return that a project can earn on the invested value (What are
some methods of capital expenditures. 2015). IRR of the project A is 27.10%. Whereas, same of
the project B is 36.26%. IRR of the project B is higher than project A and due to this reason
former project is considered better then latter project.
TASK 4
4.1 Discussion on the main financial statements
The main financial statement of the firm is as follows. Income statement- It is statement that show the profit and loss that a firm make in the
specific financial year. It also indicates the expenses that a firm made in order to operate
its business. By comparing current year income statement with the previous year
statement managers comes to know about the areas where they makes an extravagance. In
other words, it can be said that by using comparative income statement managers comes
to know about the areas where they need to work as soon as possible in order to keep
expenses under control.

 Balance sheet- Balance sheet is a statement that indicates the firm financial position at
the end of the specific year (Pew Tan, Plowman and Hancock, 2007). This statement
reflects the assets and liabilities at the end of the fiscal year. On the basis of balance sheet
ratio analysis is done and firm performance is evaluated from various angels. Hence, it
can be said that balance sheet is an important financial statement for the firm.
 Cash flow statement- It is statement that indicates the cash inflow and outflow that
happens in the operating, investing and financing activity. On the basis of cash flow
statement cash and bank balance that remains at the end of the fiscal year is identified.
Profit and loss account does not reflect the accurate profit earned by the firm. In order to
remove this shortcoming from the cash flow statement noncash items are added back to
profit in order to find out accurate profit earned by the firm (Rigby, 2011). This statement
provides a lot of information about the cash inflow and outflow and due to this reason it
is widely used by the mangers for decision making.

4.2 Format of financial statements for different organizations
Illustration 1: Income statement of the company
(Source: Rigby, 2011)

Illustration 2: Balance sheet of the company
(Source: Parmenter, 2010)

Illustration 3: Cash flow statement of the company
(Source: Ogayar and Vidal, 2009)

Sole trader
Illustration 4: Income statement of sole trader
(Source: Obst, Grahamand Christie, 2007)

Illustration 5: Balance sheet of sole trader
(Source: Nicholson and Aman, 2012)

Illustration 6: Cash flow statement of sole trader
(Source: Maxymuk, 2000)

Partnership
Illustration 7: Income statement of partnership
(Source: Lewellen, 2004)

Illustration 8: Balance sheet of the partnership
(so

On the basis of analysis of financial statements of different mode of business it has been
find out that there is a slight difference between financial statements for different organizations.
This slight difference is observed in the financial statements because size and nature of
operations vary in case of these organizations.
4.3 Ratio analysis
Table 7: Ratio analysis
2013 2014
Net profit 974 -5741
Net sales 63557 62284
Net profit ratio 1.53% -9.22%
Illustration 9: Cash flow statement of partnership
(Source: Ge and McVay, 2005)

Gross profit 4010 -2112
Net sales 63557 62284
Gross profit ratio 6.31% -3.39%
Current asset 15572 11958
Current liability 21399 19810
Current ratio 0.72 0.6
Debt 9188 10520
Equity 14715 7071
Debt equity ratio 0.62 1.48
Interpretations
Net profit ratio- Net profit ratio indicates the percentage of sales that is covered by the net profit.
This ratio also indicates the firm cost control capacity (Vos, et.al, 2007). In the FY 2014 this
percentage was 1.53%. Whereas, in FY 2014 this percentage become negative to -9.22%. This
indicates that firm revenue decline by the huge percentage. This is evident from the revenue
figure in which it has been observed that in FY 2014 revenue was 63,557 but in FY 2015 it
become 62,284. On other hand, firm makes extravagance and due to this reason its net profit
decline at a fast rate. Due to all these reasons in FY 2015 net profit ratio becomes negative by -
9.22%.
Gross profit ratio- It indicate the percentage of sales that is covered by the gross profit. It also
indicate the extent to which firm is maintaining control on its direct expenses. Gross profit ratio
in the FY 2014 was 6.31%. While, same in FY 2015 become negative to -3.39%. Here it can be
seen that gap between both year ratio values is very large. This reflects that direct expenses of
the firm slightly increases and less earning of profit is the main reason behind fall in gross profit
ratio of Tesco. This also indicates that Tesco has a good control on its direct expenses but less
control on indirect expenses. Hence, it can be said that this is weak point of Tesco.
Current ratio- Current ratio is a ratio that reflects liquidity position of the firm (Wilmott, 2013).
Standard current ratio is 2:1 which means that for every one pound of current liability there must
be a two pound of current assets. Current ratio of Tesco in the FY 2014 was 0.72. Whereas, in

the FY 2015 this ratio was 0.6. This reflects that firm has fewer amounts of current assets to pay
its current liability. In other words, it can be said that firm does not have a sufficient amount of
current assets to pay its current liabilities on time. Hence, it can be said that firm needs to
improve its performance on this front.
Debt equity ratio- This ratio indicate the firm capital structure and proportion of debt and equity
on same. This ratio in the FY 2014 was 0.62. But in FY 2015 this ratio increase to 1.48. This
indicates that firm gives a poor performance and proportion of debt in its capital structure gets
increased. This is a negative sign from firm point of view. Hence, Tesco needs to make sure that
proportion of debt in the capital structure remains low.
CONCLUSION
On the basis of entire discussion it is concluded that firm must consider lots of factors
while selecting an appropriate source of finance. In this regard, cost of sources of finance and
risk associated with them can be considered by the managers in order to select appropriate source
of finance for the firm. Firms must do financial planning time to time in order to make sure that
finance which is a scarce resource is used in efficient and effective manner. Along with this, it is
also concluded that firm must review their budget and actual performance time to time in order
to make sure that actions will be taken on time regarding business strategy. Project plays a great
role in growth of an organization and due to this reason it is necessary to use some specific
techniques. Project selection on the basis of assumptions may p-prove costly for the firm in the
near future. Hence, by applying project evaluation techniques specific project must be selected
by the project managers.

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