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Types of Sources for Raining Fund | Study

   

Added on  2020-01-16

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FINANCIAL ANALYSISAND MANAGEMENT(PART 2)1

TABLE OF CONTENTSINTRODUCTION...........................................................................................................................3TASK 1............................................................................................................................................3Critically evaluation of five external source of finance which are available for a public listedbusiness entity..............................................................................................................................3Explaining considerations which are must taken by the firm at the time of selecting financingsource...........................................................................................................................................9TASK 2..........................................................................................................................................11Explanation of Weighted Average Cost of Capital (WACC)....................................................11Critically evaluating influence of long term financing sources on WACC...............................12CONCLUSION..............................................................................................................................12REFERENCES..............................................................................................................................132

INTRODUCTIONAt the working environment of any business finance is as a backbone which supports tostand and exists in the market or industry. Apart from this, when an entrepreneur going to expandits business at the other market then also it requires fund or capital which provided by the varietyof financing sources. In the current study different types of sources for raining fund which areavailable for public listed entities are critically evaluated with the merits and limitations both.Further, it shows those information which requires for the public company while choosing asource of finance. In the second part of the present study Weighted Average Cost of Capital isexplained along with impact of long term financing sources on it.TASK 1Critically evaluation of five external source of finance which are available for a public listedbusiness entityWhen any firm make plan to expand business in new market then very key necessarywhich require is such as financial resources because without this the management not able toenter in the other market. In this condition in there are variety of external as well as internalsources by which the management of public listed company able to raise fund and then can easilyenter in agreed and expected market (Michalski, 2012). In context to this for public listed firmthere are different external source of finance are available which elaborated along with benefitsand limitations are as below:External source of finance1. Equity financingIt is the most widely used and adopted financing source for the public listed entities whileenhancing fund in the business. It is a source in which the company issue its shares and stock inthe market using IPO and FPO. Further, the shares are purchased by the shareholders and thesum of money is to be used in firm for expand and any other business purposes. Someadvantages and disadvantages of equity financing are as below:Advantages:3

It takes very less cost of finance which not affects to the profitability ratio and margincondition in the industry of operating. Further, dividend amount is given to the potentialshareholders on the money invested in shares but if the firm has positive and better profit.While raising capital on the basis of such financing source the public companies not needto repay any kind of payments which is the major benefit of it (Lord and et.al., 2013).If talking about the risk factor then there is lower risk in the equity financing as compareto all the available source of fiancé at external level.Disadvantages:Equity financing is a time consuming process while issuing shares in the market. Alongwith this it is compulsory to listing in the stock market if the firm wish to raise fromequity. Further, listing process in stock market is also long and wide which takes moretime.In equity financing the shareholders become a part of the business and they have right tointerfere in business decision making process. Hence, the company loss power to makeeffectual business decisions because of involving the stockholders in some businessmeetings (Flood, Mendelowitz and Nichols, 2013).It is highly compulsory to fulfill all the legal and regulatory compliances which areimpose by the stock market on the public listed firm.2. Bank loanOther financing source which is available and suitable for public type of firms is bankloan in which the company takes amount from the commercial banks. While taking capital frombank it imposes interest charges on firm as a cost of finance. Further, bank loan is a medium orlong terms source of finance which has some limitations and benefits which are expressed asbelow:Benefits:Very key benefit of the bank loan is that it provides tax deductable services along witheffectual financial plan against of paying the interest amount and charges by the publicfirm which lead to increase profit.Apart from this, process of raising capital through the bank loan source is easy and of thevery short term.4

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