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Financial resources and decisions management - Essay Example

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Task 1 1.1 In order to finance any project, a company needs to raise capital in the form of revenue funds, short term finance, long term finance, running finance etc. Raising capital can be a significant and crucial task for any company as several technicalities and procedures are involved…
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Financial resources and decisions management
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Financial resources and decisions management

equity and debt, comes with their advantages and disadvantages. Several factors, such as statutory rules and requirements, terms and conditions imposed by the counter party and general economic conditions are analyzed before selecting one of the options. The downside of acquiring financing through issuance of equity is that the procedure is quite complicated as compared to acquiring funds by approaching any bank. In most cases, a loan is acquired from any bank or financial institution by filing an application for the sanctioning of the loan. The bank or any other financial institution, after evaluating the necessary details such as credit history, financial outlook for assessing the ability of the entity to repay the loans in future, and the purpose of the project for which the loan application was filed, sanctions the loan. Whereas in the case of raising finances through issuance of equity shares, the company has to fulfill several requirements such as issuing a predefined number of shares, issuing shares to the existing shareholder in proportion to their existing shares and appointing a financial advisor for conducting a due diligence of the entity’s operations. ...
In contrast, in equity financing, the company has to wait for a considerable longer period of time for the funds to become available for their utilization. 1.2 The two modes of finance available to the company would be raising funds through issuance of equity or acquiring loan in the form of a mixture of a long term and short term debt. Let us assume that the total requirement of funding for Quality windows Ltd is for ? 100,000. As provided in the scenario, 40% of the funding requirement can be met through internally generated funds, whereas for the remaining 60% the company has to decide about the mode of funding. Thus the amount of fund required to issue is ? 60,000. Option 1: Raising the fund through the issuance of shares The company decides to issue 6,000 shares at ? 12 (par value is ? 10 and premium is ? 2). As per the current market knowledge, the issuance cost per share is ? 1. Other administrative cost pertaining to the issuance of share is ? 5,000 in total which relates to publishing prospectus and appointing an under-writing agent. Thus the total cash inflows to the company for the first financial year would be as under: Particulars Amount in ? Shares issued 72,000 Issuance cost (6,000) Other costs (5,000) Total inflow 61,000 Option 1: Acquiring loan from a financial institution The company decides to acquire loan from a financial institution amounting to ? 70,000. The principal repayment will start two years from the end of the current financial year. In return, the financial institution will charge interest rate at the rate of 12%. Thus, following is the net cash inflow at the end of the financial year: Particulars Amount in ? Loan acquired 70,000 Interest cost (8,400) Total inflow 61,600 Thus it is apparent from the above analysis, that acquiring ... Read More
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