FINANCIAL ANALYSIS

London wood Limited



Introduction

The report is prepared on London wood company limited which has provided information related to financial statements of the company and some basic information which has helped in financial planning by analyzing the source of finance. The report covers the subject area of managing financial resources and decision. The financial ratios have been calculated and interpreted to analyze the company's strength and standing with in the market so that funds can be allocated properly and feasible decisions could be made.

Part # 1

Sources of Finance available to London woods

Finance of any company is an essential component of business which helps in development, expansion and diversification. It is considered to be the main factor of business which helps in allocating and managing resources efficiently. London wood business has both used both internal and external sources for financing their business. The internal funds are those being easily available in organization: personal savings, retained profits, working capital and sale of fixed assets whereas external sources are the outside sources to which a firm has to return the money back like banks, shares and leasing etc (Myers, p. 126). The following source of finance has been identified that is available to London wood business:

Internal source of funds: Londonwood has retained profits, working capital i.e. amount derived after subtracting current assets from current liabilities.

External source of funds: London wood has borrowed money from banks, and issued shares to general public as their source of finance.

Assessing the impact of the sources of finance to London woods Limited.

The business of London woods limited is going to have both positive and negative from the source of finance. The primary aim of the business is to maintain a steady flow of cash for financing its production chairs and incorporating total quality management in their process. The positive impact occurs from the selling shares company has sold its stock in the market and is funding their business through equity financing which gives them fast and easy access to cash which is not liable to any interest payments. However, dividends have to be paid to shareholders from retained earnings or the company can plough it back for further expansion and progress. Secondly, higher amount of working capital which shows that company has strong financial assets and capability to pay off their liabilities like loan and cost of capital. The other sources like loans from bank could pose negative impact to a company when they have to pay higher cost of interest for the amount they have borrowed.

Evaluation of sources of finance in purchasing machines

As mentioned in the case, the source of finance being suggested by Mathew was borrowing loan from the banks which do not sound feasible as cost of capital is 12 percent which is too high and could result in higher cost of production which will reduce the profit of London woods limited. There could be several other sources available to London woods for funding their production and development of business. The other sources they could use include sales of fixed assets, ...