FINANCIAL MANAGEMENT

Gearing & Financial Policies of P&G - FTSE 100 Company

Abstract

Sources of finance holds an immense importance for businesses, since they become the basis of business's financial success or failure. Debt and equity are two major sources of finance that are used by firms. This report provides a comprehensive research on gearing and financing policies with respect to a FTSE 100 company, Procter & Gamble. The company uses a blend of equity and debt; however, the analysis of its last five year's financials reveals that it has been more focusing on equity funding than relying highly on debt financing. The maturity profile of company represents that P&G has minimized its financial risk by having variety of medium or long-term loans with different maturity dates over the period of 24 years. Furthermore, company's gearing policy satisfies its corporate objectives, and various relevant theories are also analyzed with respect to P&G's gearing position.

Introduction1

Sources of Finance1

Equity Financing1

Debt Financing2

Short-Term Sources of Finance2

Procter & Gamble - FTSE100 Company3

Maturity Profile3

Overview of Maturity Profile3

Procter & Gamble's Maturity Profile4

Gearing Ratios5

Overview of Gearing Ratios5

Gearing Ratios of P&G & Its Interpretations5

i.Debt to Equity Ratio:6

ii.Debt to Capital Ratio7

iii.Interest Coverage Ratio8

Trend of Gearing9

Gearing Policy & Corporate Objectives10

Relevant Theories10

Pecking Order Theory10

Trade-Off Theory11

Signalling Theory11

Conclusion12

References13

Gearing & Financial Policies of P&G - FTSE 100 Company

Introduction

Sources of finance play a significant role for firms, as they are used for financing the business in a cost effective manner and gain financial viability (Long, 2011, p.13). As a financial analyst in Procter & Gamble, one of the FTSE 100 Companies, I have prepared this report to advice clients of P&G on firm's gearing and financing policies. So, this report provides an in-depth analysis of sources of finance and gearing with respect to a FTSE 100 company, Procter & Gamble.

Sources of Finance

A number of sources of finance are available to businesses. Among these sources of finance, two major types of financing sources are used by businesses: equity and debt.

Equity Financing

Equity financing is provided by the shareholders, legal owners of the company. They contribute equity capital by buying the stocks that are issued by a firm (Pandey, 1995, p.175).

The net profit earns by a firm belongs to their stockholders and thereby earnings remain in the firm that also add to the funding from stockholders.

The shareholder's equity includes share capital, stock premium, retained profits, and re-evaluation reserves.

Shareholders capital is quite expensive for a company but associate less risk; however, from investor's perspective it is quite risky and therefore they require higher returns which make it quite expensive.

Debt Financing

Second most significant source of finance is borrowing i.e. loan borrowed from the financial institutions, mainly banks. The lenders of funds are known as creditors; where, these creditors provide funds to business in terms of loans in response to a contractual set of cash flows i.e. interest and principle amount on debt (Pandey, 1995, p.175).

Debt financing varies with respect to the time duration i.e. there are three types of debts a company can access: long-term debt, medium-term ...