Managerial Finance and Financial Markets: Gravier Plc and Expo Plc Financing - Essay Example

Managerial Finance and Financial Markets: Gravier Plc and Expo plc Financing Grade (November 10, Managerial Finance and Financial Markets: Gravier Plc and Expo plc Financing Introduction Gravier Plc and Expo plc are two different business entities that are seeking for financing in order to meet their different objectives. Financing is a common challenge for business, whether in the start-up stage or during the growth and expansion stage of the business, due to the fact that such business have not attained the right level of business capitalization (McNally, 2002). The sources of capital from which business can choose are many, but business are still faced by the dilemma of financing their activities, due to the fact that there are certain issues that are associated with each source of business financing, which makes them either difficult for business to access due to the logistical and bureaucratic procedures involved, or because of the sources being too costly for the business to afford (Besley & Brigham, 2008). In this respect, businesses must be very careful in selecting the source of financing that will suit their situation, while at the same time ensuring that they will be in a position to meet the demands of such sources of financing, without being rendered into a state of permanent debt. In addition, it is also vital for the business evaluate the source of capital which are viable, while still ensuring that such source of capital are congruent to the business objectives of ensuring the sustenance of their identity as well as the maintenance of a healthy cash flow, since such factors may determine the future direction of the business (Carter, MacDonald & Cheng, 1997). Therefore, while assessing the sources of business financing available for Gravier Plc and Expo plc, such factors will be put into consideration, with a view of arriving at the most appropriate sources of financing for these business entities. Key differences of the two cases Gravier Plc and Expo plc are two business entities that are seeking for financing of their different business objectives, although the two businesses compare in the fact that they are both businesses that are already running, such that they are seeking for working capital financing. Secondly, the two companies compare in that both are seeking for the long-term financing of their businesses. Nevertheless, the major difference arising between Gravier Plc and Expo plc is that; while Gravier Plc is a nationwide company involved in the production of materials for housing building, Expo plc is a relatively small biotechnology company that has only one big public customer. The other notable difference between the two business entities is the fact that; while Gravier Plc is seeking capital in order to diversify its business and move into another area of production which is manufacturing materials for road construction, Expo plc is seeking for capital in order to relocate into a region where there is a higher potential for the biotechnology business. Finally, the two business entities differs in the sense that, while Gravier Plc has an annual turnover of £200 million and thus is seeking a capital financing worth £50 million, Expo plc has only an annual turnover of £5 million, and thus is seeking for a capital financing of F8 million. The notable differences between the two companies definitely mean that the two companies have different accessibility to the available sources of capital, owing to the difference in their sizes, their objectives and their financial capabilities. Suggestion for the form of financing; i. Gravier Plc Going public Going public is one of the most appropriate source of business capital for Gravier Plc, owing to the fact this business is an already well-established entity that offers its products national wide in the UK, thus the business has already build a name and reputation for itself (Thompson, 2004). The major factor that makes going public the most appropriate source of financing for Gravier Plc is because the company will easily attract the investment of the public, due to the fact that the public already knows of the existence of the company, and for that reason it will be easy for the public to purchase the shares of a company that they know, as opposed to a company that is new to the public. The other major consideration while choosing going public as the moist suitable method for this business is the fact that the company is already a big business with a high annual turnover of $200 million, making it possible for the company to be able to divide its total worth into many shares that can be issued to the public (Rao, 2010). Additionally, Gravier Plc is seeking a huge capital financing of $50 million, which makes it difficult for other sources of business capital such as bank loans and profit retention to be able to reach such high values. This leave the listing of the company’s share on the stock market as the most plausible source of financing for the business, since the company will be able to generate a large amount of funding by issuing shares to the public, as opposed to accessing piece-meal finance from the other sources of business financing that cannot afford to lend the company the whole $50 million that is required (Tracy, 2013). Going public is also a good source of financing g for Gravier Plc, due to the fact that the company is seeking for long-term financing, which then means that it can be able to repay the publicly traded share through dividends in the course of its long-term operation. Therefore, the advantage that the company will obtain from going public is that it will access huge funding from the public, and the company will not be required to repay the money back to the public directly, only through giving them interests on their share contribution through dividends, while retaining the capital obtained for its growth and expansion course into the new area of business supply (Confederation of British Industry, 1974). Finally, going public is a good method for funding the capital needs of Gravier Plc, due to the fact that the company is already big and its annual capital turnover is equally big at $200 million, thus making the company able to meet the necessary legal threshold of the financial limits for companies that can list their shares in the stock market (McNally, 2002). Partnership financing Partnership financing is yet another plausible source of capital for Gravier Plc, due to the fact that the company is seeking to diversify its business from the initial focus on the housing building materials production, to engage in the production of materials for road construction. Therefore, the company can easily establish a subsidiary or a joint venture with another company seeking to enter or already serving in the road construction industry (IWS, 1971). The advantage associated with this form of financing is that; Gravier Plc will retain its initial identity and focus in the housing industry, while establishing its subsidiary in partnership with other company, making it possible for the company to operate in both industries. The capital requirement of $50 million can then be shared by the partners establishing the subsidiary, such that the capital requirement will be lower making it possible for Gravier Plc to afford investing in the subsidiary through internal financing such as retained profits (Rao, 2010). The other advantage that will come with Gravier Plc partnering with firms in the establishment of a subsidiary to serve in the newly targeted market is that; since the road construction is a new market that Gravier Plc has not served before, it will be able to lower the risks involved in failure of new markets through sharing the risks with the partners (Besley & Brigham, 2008). Expo plc Angel Financing /Venture capital Venture capital is an appropriate source of financing for Expo plc, due to the fact that Venture capital is a good source of funding for business which is not able to access the conventional sources of funding, due to limitations such as the high skills requirement of the type of business (Chandra, 2008). Thus, angel capital goes a long way in financing the business that has taken the nature of Expo plc, since the angel capitalists seeks to finance novel, innovative and unconventional business ideas that other sources of financing will not easily go for. Thus, this source of financing will serve Expo plc appropriately, since the angle financiers will also cooperate with Expo plc through the new establishment it seeks to create in a new geographical area, since angle financing supports a business not only with capital, but also through offering the further needed support in the process of business establishment (Thompson, 2004). Bank Loans Bank Loans is a suitable source of capital for Expo plc. This is because, the company is not seeking very high capital financing, since it requires a capital of $8 million, which can be afforded by many banks (Rao, 2010). Secondly, Expo plc is seeking for long-term financing, and bank loans allows businesses to repay the loans for an extended period as agreed between the bank and he business, thus making this source of financing suitable for the company. In addition, considering the fact that the company does not have much financial resources, with the company having an annual turnover of $5 million, such a company can have difficulties accessing funding through the stock market, while savings and retained profits may not reach the threshold (IWS, 1971). Further, Expo plc is a company operating in a high skilled and specialized area, which would limit partnership funding, since finding another partner with interest in such a niche market is a challenge. Conclusion Gravier Plc and Expo plc are companies that are seeking for funding to be able to grow their businesses. The two companies have access to various source of capital, but the demands of such sources of capital limits the companies to a few options. Thus, while Gravier Plc is better funded through going public and also through partnership financing, the most appropriate sources of financing for Expo plc are venture capital and bank loans, since such sources of capital can offer the range of capital required by the company, while angel financing will go an extra mile to assist the business establish the new location venture. References Besley, S., & Brigham, E. F. (2008). Principles of finance. Mason, Ohio: South-Western. Carter, S., MacDonald, N. J., & Cheng, D. C. B. (1997). Basic finance for marketers. Rome: Food and Agriculture Organization of the United Nations. Chandra, P. (2008). Financial management: Theory and practice. New Delhi: Tata McGraw-Hill Pub. Confederation of British Industry. (1974). Sources of finance for industry and commerce: Characteristics, advantages and disadvantages of the main forms and sources. London: Confederation of British Industry. Hussain, A. (2010). A Textbook of Business Finance. East African Publishers. IWS (1971). Business capital sources. Merrick, N.Y: International Wealth Success, Inc. Rao, D. (2010). The 12 Best Sources Of Business Financing. Forbes Magazine. Available at: http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-entrepreneurs-finance-dileep-rao.html Rao, D. (1979). Handbook of business finance and capital sources. Minneapolis, MN: InterFinance Corp. Thompson, D. A. (2004). Sources of Business Financing. Boyne Clarke. Tracy, J. A. (2013). Accounting for dummies. Hoboken, N.J: Wiley. McNally, K. (2002). Corporate Venture Capital: Bridging the Equity Gap in the Small Business Sector. Routledge. Read More