Finance Sources, Implications, and Stock Listing for Milner Chemicals

This report provides a comprehensive financial analysis of Milner Chemicals Plc, examining various aspects of its financial strategy. It identifies and assesses different sources of finance, including internal and external options, and evaluates their implications for the company. The report delves into the advantages and disadvantages of obtaining a listing on the London Stock Exchange, along with the methods available for achieving this. Furthermore, it analyzes the cost of different types of capital, such as ordinary shares, preference shares, and debentures, and calculates the Weighted Average Cost of Capital (WACC). The report also addresses the importance of financial planning, the informational needs of different management levels, and the impact of finance on financial statements. Additionally, it includes calculations of production costs, prices, and profit, along with a production budget and the calculation of Payback Period (PBP), Accounting Rate of Return (ARR), and Net Present Value (NPV). The report concludes with a detailed assessment of the company's financial position and strategies.

Table of Contents
Task 01.............................................................................................................................................3
1.1 Identify different sources of finance..........................................................................................3
1.2 Assess the implications of the different sources........................................................................3
1.3 obtaining a listing in a stock exchanged....................................................................................3
1.4 methods of obtaining a listin......................................................................................................3
1.5 the methods of raising capital....................................................................................................3
Task 02.............................................................................................................................................3
2.1 Cost of Shares & Debt...............................................................................................................3
2.1 (a) Cost of Ordinary Share Capital............................................................................................3
2.1 (b) Cost of Preference share capital...........................................................................................3
2.1 (c) cost of debenture capital after tax........................................................................................3
2.1 (d) Calculating the Weighted Average Cost of Capital (WACC).............................................3
2.2 Importance of Financial Planning..............................................................................................3
2.3 Informational Needs of Directors, Senior Managers and Junior Managers..............................3
2.4 Impact of Finance on the Financial Statements.........................................................................3
Task 03.............................................................................................................................................3
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3.2 calculations of the production cost, price and profit..................................................................3
3.1 Production Budget.....................................................................................................................3
3.3 Calculation of the PBP, ARR &NPV........................................................................................3
References........................................................................................................................................3
Task 01
1.1 Identify different sources of finance available to Milner chemicals Plc.
As the Milner chemical is a Public Limited Company, it is capable of raising the capital from
two main sources such as internal sources or external sources. (Samuelson, 2006) So here the
internal sources are implying the capital which are generated from the insider of the organization
such as holding the profits of the organization other than dividing to the shareholders, reducing
the inventory level of the organization or delay the payments to its creditors etc. on the other
hand the Milner Plc is capable of going to external fund sources and there are three main types of
external finances such as short term, Medium term and long term. (Charles, 2004)
Here the short term financing sources are indicating the money market which is consisting of the
securities which are matured within one year period or less than one year like treasury bills,
commercial papers etc. and then the medium and the long term financing will indicate the capital
market which is comprising with the securities which are matured more than 5 years like treasury
bonds, bank loans, government bonds etc. so here the company should have to determine their
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fund requirements with the time framework and the expected future obligations in a cost
effective manner.
Here the trade credit, short term bank loans and the advances, overdrafts, cash credit, customer
advances, installment credit and loans from cooperatives etc. can be identified as short term
external finance sources. And then the medium term loans and the advances as well as the
medium term cash credits, medium term cooperative loans etc. can be considered as medium
term external financing sources to the Milner chemicals. Finally it can be recognized that there
are so many long term finance sources to Milner chemicals like loan finance or loan stocks such
as ordinary shares preference shares in stock market, debentures, long term bank loans,
convertibles debentures and convertibles loan stocks, mortgages, leasing, hire purchase, debt
factoring etc.( Crockford, 2006)
1.2 Assess the implications of the different sources.
When it comes to identify the implications of the internal financing sources of the Milner
chemicals, it can be identified that the internal financing has lesser cost than external fund
sources with raising the capital internally. And also it is not necessary to repaid and no interest is
payable for that as well. But there is a huge capital constraints regarding the amount of money
can be raised itself. (Berezin, M., 2005)
However when it comes to external financing, it may lead to arise a huge amount of money from
the capital markets and it will cause to enhance the financial leverage of the company and
thereby the enhancing the ROE as well. (Shapiro, 2008) Here the company should have assess its
funds requirements in terms of the short run, medium run or long run and the expected capital
structure of the company before going to select the financing resources internally or externally. If
the organization is willing to go for the financial leverage, then it would be better to go for the
debt financing options. (Samuelson, 2006) And also here the company should have to evaluate
their life cycle and place they are n currently, because the debt financing is suitable for the
growing or maturity level firm and unless otherwise it would better to go for equity fiancé with
the existing shareholders of the company and the operational leverage with lower level of debt or
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no debts within the capital structure of the company. So it is very much important to Milner
chemicals Plc to evaluate their existing capital structure and the expected capital structure before
going to select the options related to the debt financing or equity financing here. (Berezin, M.,
2005)
Bank loans
Advantages Disadvantages
This is good for the budgeting of the company
as the repayments can be spread over the time
period easily
This can be more expensive as the interest
payments
Bank will require some securities for the long
term loans itself
Share Capital (Ordinary Shares & Preference Shares)
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Advantages Disadvantages
Suitable as long term finance source with the
requirement of redeemable or unredeemable
base
Profit has to be paid as dividends and there is
some circumstance that the company should
have to pay the obliged dividends as it is,
whether there are no profits for the year.
No need to pay the interests as only have to
pay dividends as residual claims of the
organization
Ownership of the company can be changed
with the increasing no of owners for the
ordinary shares issuing
No liability exists, beyond the company’s
assets
Share value may become decrease with the
increasing no of shareholders, thus it may
cause to future acquisitions or liquidation of
the company as well(Samuelson, 2006)
Leasing & Hire Purchase
Advantages Disadvantages
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Company s capable of using the required
equipment’s immediately
Become more expensive with the overall
procedures as well as the interest calculations
as the method of compound interest
calculations.
Repayments can be spread over the time The assets may belong to the finance company
sometimes after finishing the repayments as
agreed and it will create unexpected occurring
with asset back loans and other purchasing
procedures of the company
Mortgages
Advantages Disadvantages
Business is capable of using the properties Become more expensive with the interest
components associate with this
Repayments can be spread over the time If the repayments cannot be done timely, then
it lead to reposed the assets (Samuelson, 2006)
Trade Credits
Advantages Disadvantages
Company can sell the goods and pay after that Discounts for the cash payments will be lost
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Suitable for the cash flows of the company Ned to be more careful about the liquidity of
the company as the debt id due to pay
No need to pay interest if it has paid within the
agreed time period
There should be a better liquidity within the
organization and it will lead to reduce the
profitability as well.
1.3 What are the advantages and disadvantages of obtaining a listing in a stock exchanged like the
London Stock Exchange
Advantages Disadvantages
Milner chemicals can increase their capital as
expectedly
This is an expensive process to the firm with
huge legal expenses, underwriter’s expenses
etc.
It leads to place a value to the company’s
stocks
Have to operate under the closet scrutiny
It gives the permission to access to the capital
market in future financing needs too
Decision making process may become more
formal and low flexible
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Debt- equity ratio or the leverage ratio will
increase and it leads to increase the
shareholders’ wealth (Samuelson, 2006)
Have to comply with the financial reporting
requirements with the accounting frameworks
and government regulations
Promoting the company in the market while
getting the publicity and stability image
Increase the level of risk to civil liability
exposure
Allow to attract better level of personnel to the
organization
Increase the pressure of increasing the earnings
for the emerging shareholders
Able to make the stock options and it will
result to increase the share vale and thereby the
firm value
Risk of the takeover attempts by the others
1.4What are the methods of obtaining a listing in the London Stock exchange
Introduction (Retail Offer)
Here the company is joining to the market without generating any capital. This can be done only
if the company’s 25% of the shares have already existed on the public hand. However this will
limit the visibility of the company with low requirement of advertising itself. (Charles, 2004)
Placing
This may involve with the offering the shares of the company to the selected institutional
investors only. So there the institutional investors are not the individual investors and they are
mainly the pension funds, venture capital firms etc. (Samuelson, 2006) so such investors are
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having high level of influence to the performance of the company in the future as well. However
this leads to narrow the shareholder base with lower liquidity needs. (Shapiro, 2008)
Initial public offering (IPO)-(Offer to Intermediaries)
This is the first time of offering the shares to the public and with the underwritten as well.
However this is more expensive route, but it can raise substantial amount of capital for the
Milner chemicals as well. Here the company is capable of enhancing their capital as expected
manner and expected amount as there the company will have direct cash flow itself. However
there are some associated huge costs with the brokerage fees and the legal proceedings of the
entire process if IPO as well. (Crockford, 2006)
1.5What are the methods of raising capital in the London Stock Exchange
There are some methods of raising the capital in the London Stock Exchange as follows;
 Issue the equity securities as an IPO or secondary issue
 Issue the depository receipts
 Issue the debt securities like bonds. (Samuelson, 2006)
Here the company is capable of issuing their ordinary shares as an initial public offering or
secondary offering within the market in order to raise the expected capital form the market. On
the other hand the company is possible to issue some kind of depository receipts like the
commercial papers within the market in order to gather the money from the public to expand
their business furthermore. But here the company should have to consider about their future
obligations with repayment of the capital and interest portion for the debt holders or the security
holders itself. And finally the company is also possible to raise their required capital from the
debt securities in the market like mortgages, treasury bonds, government bonds etc. And also
here the company should have to evaluate their life cycle and place they are n currently, because
the debt financing is suitable for the growing or maturity level firm and unless otherwise it would
better to go for equity fiancé with the existing shareholders of the company and the operational
leverage with lower level of debt or no debts within the capital structure of the company.
Likewise the Milner Plc is capable of going for any method of raising funds from the London
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Stock Exchange according to their main capital requirements and the main goal of expanding its
business furthermore. (Berezin, M., 2005)
Task 02
2.1 Cost of Shares & Debt
2.1 (a) Cost of Ordinary Share Capital
Calculation of cost of equity share capital: it is calculated via Expected dividend/ current market price of
the share+ growth rate of shares. Here, company paid dividend 10p which is going to grow by 8% in the
next year. So the expected dividend= 10+8%= £0.108, and the value of the current ordinary share was
£2. so the cost of equity would be:
.108/ £2+8%*100 = 5.832%
2.1 (b) Cost of Preference share capital
Cost of preference shares shall be calculated as: dividend or return on preference shares/ price of the
preference shares. Here,
Dividend on preference shares was 12% on value on the preference shares. i.e 1.2*12%= 0.144 would be
the dividend amount. Market price of the shares is £1.2. hence, cost of preference shares =
0.144/1.2*100= 12%
2.1 (c) cost of debenture capital after tax
Company’s cost of debenture is calculated as: interest rate*(1-tax rate)/market price of debenture.
Here, the data has been provided that the tax rate is 20% and market price of debenture is £120 and
10% interest rate is given. so it is easy to calculate the cost of debenture by putting the values in the
formula:
10(1-0.20)/120*100= 6.67%
2.1 (d) Calculating the Weighted Average Cost of Capital (WACC) as per market value
(£000)
Sources quantitiy price Amount Cost of Amount*cost
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capital of capital
Equity Shares 2.000 £2 £4000 5.832% £233.28
12%
Preference
share
1000 £1.2 £1200 12% £144
10%
Debentures
10 £125 £1250 6.67% £83.375
Total £6450 £460.655
NOTE- Number of preference shares of the company is assumed to be 1000units.
WACC = sum of amount* cost of capital/ sum of amount
£460.655/6450*100=7.14%
WACC of the company is 7.14%
2.2 Importance of Financial Planning
Basically the financial planning is capable of determining the financial goals in terms of short
term as well as long term while creating a well-balanced plan of meeting such goals successfully.
(Shapiro, 2008) On the other hand, there are several reasons that will enhance the importance of
the financial planning as follows; (Berezin, M., 2005)
 It is very much useful to manage the income of the company more effective manner
while understanding the tax payments, savings as well as the other related expenses
 Enhance the cash flows of the company while monitoring the spending behavior and the
related expenses. So this will lead to enhance the earned cash on hand
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