Finance for Non-Finance Managers - Assignment Example

? Finance for non-finance managers Contents Contents 2 Answer 3 Purely Debt 3 Pure Equity 4 Answer 2 5 Answer 3 6 Answer 4 7 References 9 Answer Barnet Solution is going for expansion in the European market. For that Barnet solution will need to raise ?40 million additional funds. The company has two ways of raising the fund. One is through equity and another is through debt. The company can look for both the option or go for a combination of both debt and equity. Each of the option has its own advantages and disadvantages. Purely Debt Here the company will raise the entire ?40 million from the debt market. Using debt to run the business has both advantages and disadvantages. Advantages Debt is a low cost capital. Using debt the company does not have to pay tax on it. Hence the company will have to pay less tax overall. Using debt the Earning per share of the company fluctuates more than using only equity as the source of capital. Hence during good times the Earning per share of the company will rise much higher than when the company use only equity (Tuller, 2007, p. 211). This satisfies the shareholders as they will get more in return. Hence they will always want some portion of the capital to be raised as debt. Again using debt the company don’t have to share the ownership rights with the shareholders. They don’t have to go back to the shareholders each time they need to take an important decision. All they want is to get fixed return on the investment that they have made. Again the lenders don’t have any claim on the future earnings. Furthermore if a debt can be paid on time, then the credit rating of the business will improve and they will readily get finance easily from the market next time they went to any financial institutions for loan. Disadvantages The company has to make regular monthly payment of instalment and interest. Barnet Solutions is going to expand in the European market for the first time. Hence it will be difficult for them to raise money through debt because there is always a risk involved with it. The company may even go bankrupt if they couldn’t meet there obligations. Hence Barnet needs to earn profits every year to pay the obligation. Their credit rating will get damaged if they couldn’t meet the obligation (Siciliano, 2003, p. 176). Hence it is like a double edged sword. If the economy in the European market deteriorates the Earning per share of the company will fall down drastically. The shareholder then may ask tough questions to the management regarding their decision making process. Pure Equity The company can use Equity as the source of fund. Advantages Using Equity the company can avoid the hassle of going through the long process of applying for loan. It takes more time to raise debt than equity. It is less risky than a loan because the company will not have to pay back the obligation if they cannot afford it. The company can easily tap into its investors’ network and add more credibility to the business. The investors here takes a long term view and don’t expect and immediate return. The company also don’t need to payback if the business fails (Mason, 2010, p. 212). Disadvantages The investors can demand returns more than the interest rate the company will have to pay for debt. The investors also will require ownership of the company. They have to be consulted before making any big decision. It also takes time and effort to find the right investors for the company. Period 2012 2011 D/E 1.18 0.92 The standard Debt-equity ratio of any company is 2:1. Hence it is advisable for the company to raise fund through both debt and equity. The company can go 80:20 ratio of raising the money from the market with the majority being debt and other being equity. Hence the company can raise ? 32 million from the debt market and ? 8 million from the equity market. After using the above capital the debt equity ratio will become Period 2012 2011 D/E 1.28 1.04 This shows that the company will be well within the standards limits of the Debt-Equity ratio. Answer 2 The company Barnet Solutions Plc is engaged in the sourcing and distribution of a range of hair care products. The company is going for expansion in the European markets. Hence they need to decide on the allocation of funds involved in the process of expansion. The main three kinds of budget used are Bottom up Budget, Top down Budget and Zero-Based Budget. The top down budget is prepared mostly by the top management and then it is imposed on the lower level employees to implement it (Narayanan and Nanda, 2006. The Bottom up budget is prepared by the lower level staff and it is reviewed by the chain of commands for their review and approval. The Zero based budgets are based on the proposed expenses of the specific period of time and then after completing the activity it is started back from zero. The Barnet Solution Plc is expanding its operation in the Europe. It needs to invest in its distribution channel, advertising and other promotional activities. Hence the company has to spend maximum amount in the promotional activities since the company is entering into the European market for the first time. The company has to give extra incentive to the distribution channel because they are already established with the existing market players. Hence they need to spend substantial amount on the advertisement also. It would help them make their product known to many people. They need to spend on Capital expenditure which is used to create future benefits for the company. Again the company has to spend cash on Revenue expenditure. Both the items will create asset which will be helpful for the firm in running their operation (Millichamp, 2000, p. 214). Period 2013 2014 Mortgage Payment 800000 400000 Wages and Salaries 2000000 10000000 Lease Payments 4000000 2000000 Interest 1200000 800000 Depreciation 2000000 1600000 Property Taxes 2000000 12000000 Fixed Assets 12000000 8000000 Advertisement and Promotion 16000000 5200000 As seen from the above table, it is seen that the capital raised is used in the advertising and promotion activities and in the fixed asset acquisition. The company naturally needs to pay interest to the lenders. The company has to pay property taxes, wages and salaries, Property taxes, Lease Payments etc. Answer 3 The company will raise the ?40m capital from the market by means of debt and equity. Barnet will raise ? 32 million from the market by means of debt and ? 8 million through equity. This will help the company in achieving both the ideal mixture of debt and equity, utilising the advantages of both the source of financing. As has been shown in the table above the company has to use majority of the capital to invest in the fixed asset, advertising and payment of interest. The company needs to pay the shareholders dividend through the profits which they make. Barnet Solutions Plc will invest most of the funds as capital expenditure and advertising. They need to invest into plant and machinery and equipments which will help in the production of the hair products. They also have to invest in the Research and Development which will help the company to come out with new improved products. Barnet Solutions Plc hence has to invest their capital in areas where they can earn profits and maintain it for a long period of time (Milling, 2003, p. 121). Through their expenditure in advertising and promotion they will be able to make the product known to the target customers and help them increase their sales figure. For that they need to make it available to the customers for which they have to invest in the distribution channel to make it accessible for the common people. Answer 4 Barnet Solutions Plc is a hair product manufacturing company. The company wants to open its operations in the European market. The company will obtain the funds both from the debt market (? 32 million) and equity market (? 8 million). Since the company is using debt more than equity to raise the money, the shareholders will be wary of this. The agency cost will increase because of this. The Board of directors has to take the decisions in consultation with the existing shareholders. The Board of directors has to make the shareholders the importance of using the debt more than equity. The Board of Directors will retain more control through this process, since they are using less of equity. References Mason, R. 2010. Finance for Non-Financial Managers: Teach Yourself. London: Hachette UK. Millichamp, A. H. 2000. Finance for Non-financial Managers. Mason: Cengage Learning. Milling, B.E. 2003. The Basics of Finance: Financial Tools for Non-Financial Managers. New York: iUniverse. Narayanan, M.P. and Nanda, V. K. 2006. Finance For Strategic Decision Making: What Non-Financial Managers Need To Know. New York: John Wiley and Sons. Siciliano, G. 2003. Finance For The Non-Financial Manager. New Delhi: Tata McGraw-Hill Education. Tuller, L. 2007. Finance for Non-Financial Managers. New York City: Adams Media. Read More