(solved) Managing Financial Resources and Decision Making
Added on 2020-01-28
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MANAGING FINANCIALRESPOURCES AND DECISIONMAKING
TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3TASK 1............................................................................................................................................31.1 Sources of finance available to business ..............................................................................31.2 Implications of different source of finance...........................................................................41.3 Appropriate source of finance...............................................................................................5TASK 2............................................................................................................................................52.1 Cost of different sources of finance......................................................................................52.2 Importance of financial planning for Tesco..........................................................................62.3 Information needs of different decision makers....................................................................62.4 Impact of finance on the financial statements.......................................................................7TASK 3............................................................................................................................................73.1 Analysis of budget and making appropriate decisions..........................................................73.2 Calculation of unit cost.........................................................................................................83.3 Project evaluation..................................................................................................................9TASK 4..........................................................................................................................................114.1 Discussion on the main financial statements......................................................................114.2 Format of financial statements for different organizations.................................................12...................................................................................................................................................13...................................................................................................................................................144.3 Ratio analysis......................................................................................................................20CONCLUSION..............................................................................................................................22REFERENCES..............................................................................................................................23INDEX OF TABLESTable 1: Cash budget for Tesco.......................................................................................................8Table 2: Calculation of unit cost......................................................................................................9Table 3: Calculation of payback period method............................................................................10Table 4: Calculation of ARR.........................................................................................................10Table 5: Calculation of NPV..........................................................................................................11Table 6: Calculation of IRR...........................................................................................................11Table 7: Ratio analysis...................................................................................................................21
ILLUSTRATION INDEXIllustration 1: Income statement of the company...........................................................................13Illustration 2: Balance sheet of the company.................................................................................14Illustration 3: Cash flow statement of the company......................................................................15Illustration 4: Income statement of sole trader..............................................................................16Illustration 5: Balance sheet of sole trader.....................................................................................17Illustration 6: Cash flow statement of sole trader..........................................................................18Illustration 7: Income statement of partnership.............................................................................19Illustration 8: Balance sheet of the partnership..............................................................................20Illustration 9: Cash flow statement of partnership.........................................................................21
INTRODUCTIONFinance is a life blood for any organization and no company can survive longer in theabsence of sufficient availability of finance. Tesco is one of the UK largest retail chain storesthat have a 29% market share in the entire industry. In the report Tesco is taken as a company inorder to understand various aspects of finance. In this report, sources of finance are madeavailable and discussed in detail. After that implication of each and every source of finance arealso described in the report. On the basis of implications appropriate source of finance is selectedfor 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. Inthe middle part of the report cash budget is prepared and movements in the net balance aredescribed in detail. At the end of the report, project evaluation techniques are applied and ratioanalysis is done in order to evaluate Tesco from different sides.TASK 11.1 Sources of finance available to business There are many sources of finance that are available to business. Some of these sourcesare as follows.Equity- It is a commonly used source of finance and under this, firm brings IPO or FPOin 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 usingthis source, of finance cost of finance is controlled by the firms to large extent. Due tothis 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 itsinternal as well as external business operations. On the taken loan, firm needs to payinterest which may be fixed or floating in nature (Davies and Crawford, 2011). If, rate ofinterest is fixed then there will be no problem. But, if interest rate is floating in naturethen finance cost of the firm may increase. Hence, Sony Corporation must take loan byusing fixed interest rate. Retained earnings- It is a portion of revenue that remains after paying of all theexpenditures. 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 businesspractice.Private equity- This source of finance is a variant of equity under which there is a privateequity firm which is owned a stake in the company and in return provides fund to thefirm (Elliott and Meyer, 2007). These companies purchase at least 60% stake in thespecific company in order to bring themselves in the position to influence companydecisions. This source of finance is used by the firms which are on growth stage and needfinance to accelerate growth rate. 1.2 Implications of different source of financeFollowing are the implications of different source of finance.Equity- Like every source of finance, equity also has some merits and demerits. In caseof equity, firm has to pay dividend to the shareholders. However, it is not necessary topay dividend every year. However, the rate of dividend is always higher than interestrate. This is the major demerit of this source of finance. On other hand, issue of shareslead 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 innature. So, it can be said that this source of finance has advantages and disadvantages andcompanies by considering their internal factors must select an appropriate source offinance.Debt- In case of debt, there is a fixed or floating finance cost but ownership of the firmremains same in the single hand. In order to take loan, firm needs to fulfill some criteriaand require doing some paper formalities. Firms often take debt to finance theiroperations 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 ofretained 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 somecriteria and after that it can enter into agreement with the private equity firm. Under thissource 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 thecompany. However, companies must use carefully this source of finance.1.3 Appropriate source of financeIn order to select an appropriate source of finance, it is necessary to understand thecompany’s current position. Apart from this, managers also need to evaluate advantages anddisadvantages of each and every source of finance. Manager can select an appropriate source offinance only when he analyzes company’s condition in a proper manner and identify positive andnegative points of all source of finance (Ge and McVay, 2005). On the basis of evaluating all thesources of finance, equity and debt are selected for the firm. If, Tesco invests its entire project byusing single source of finance then it will have to face lot of problems. If, debt alone is take tofinance the project then there will be heavy finance cost which may elevate in case loan is takenat the floating interest rate. On other hand, if shares are used to finance company’s operationsthen control of the existing shareholders will get diluted. Hence, it will be better to use both thesources of finance for financing project. Tesco cannot use private equity in order to finance itsproject. This is because if, this will be done then private equity firm will purchase majority ofshares 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’soperations. It can be used to meet working capital needs of the company. Due to this reason, debtand equity are considered as the appropriate sources of finance for the firm.TASK 22.1 Cost of different sources of financeCost of different sources of finance is as follows.Equity- Dividend paid on issued shares and share issue expenses are the cost of theequity as a source of finance. Determination of dividend rate depends on the topmanagement of company. Hence, it can be said that cost of this source of finance isadjustable in nature.Debt- Interest paid on debt taken by firm is the cost of this source of finance. Interest ischarged 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 whiletaking a loan from the bank. Cost of this source of finance is adjustable in nature only in
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