FINANCIAL ANALYSIS

Financing the Long Term Operations of the Business



Financing the Long Term Operations of the Business

The paper attempts to highlight the concept of financial management in a holistic context. It presents the idea of financing business operations and provides explanation to four different sources of financing a business. The paper then attempts to analyze the financing method of two selected companies, British American Tobacco plc and Philip Morris International. It also presents a detailed ratio analysis of the two companies encompassing profitability ratios and investment ratios. The paper then provides a comparison of the profitability and investment position of the two companies.

Task 1

There can be two major ways through which a company can finance, which is equity financing and debt financing (Jordan 2008 pp. 15 - 45). Both of these major financial resources have different implications with them and the decision to finance the company depends on the situation and different scenarios that a company is facing (Adams, 2006, pp 189 - 196).

Equity financing

There are two fundamental ways of raising equity finance; the issuance of the company stocks to the venture capitalists or investors, and by publically offering company stocks to the investors. When capital is raised through equity financing it involves the selling of partial interest in the firm to the shareholders (Dopson & Hayes, 2008, pp 225 - 231). In return of the investment that the shareholders made they receive the equivalent number of shares and ownership in the company (Brigham, 2010, pp. 113). The equity financing is done when company is seeking to raise more cash; the company desires to float more shares in the market, and the company desires to increase the market share by issuing and floating shares to the shareholders of other companies (Adams, 2006, pp 189 - 196).

Debt financing

The strategy of the debt financing involves the acquisition of funds from the investor or lender with the agreement and understanding that the complete amount will be re-paid in the future by the company on pre-defined terms (Dopson & Hayes, 2008, pp 225 - 231). Normally, in debt financing the lender or the investor is not entitled any ownership of the company like we discussed in the equity financing. The interest rate charged by the lender is the return for the lender in this case (Adams, 2006, pp 189 - 196). There are different ways of obtaining funds through debt financing such as by issuing convertible bonds, private bonds, convertible debentures, leveraged buyouts and different industrial development bonds. The most commonly used way is by taking a regular loan (short term and long term) (Dopson & Hayes, 2008, pp 225 - 231).

Four Different Source of Financing

Bank loans

In the event of insufficient equity, a company can borrow from a financial institution (Guilding, 2002, pp 64 - 87). It is important to know that the amount of bank loans which come under the category of external source of finance that will be granted will depend on the quality of the project and guarantees the company ...