FINANCIAL RESOURCE AND DECISION

Financial Resource and Decision

Abstract

The financial analysis essay will identify and assess the implications of different sources of financing available to sole trade, partnership and public limited companies. The essay will also describe the cost of funding from different sources and why some companies prefer to raise financing through debt rather than equity. The third section of the essay will evaluate the budget for different information and will also highlight the different kind of investment appraisal methods available to three companies with different legal status. Lastly, it will present financial statement information on TESCO and will analyse the information using rations and compare it with its direct competitor.

Managing Financial Resources and Decisions

Task 1

Select a sole trade, a partnership and a public limited company known to you and discuss various sources of finance available to those different forms of business organisations.

All companies can access to two broad categories of financing. One is internal which includes all financing which is being done by the owner or company itself. The other is external which includes all financing available to the company depending upon its size and legal status.

Sole Trade

Broadly two sources of funding are avail to sole trader; internal and external. Internal includes, owner's personal investment, retained profits of the business, share capital that is being invested by the founder. External financing includes bank loan which might take the shape of long term or short term. Private equity is specially famous financing source which can be used by sole trade companies.

Partnership

Partnership may have different either unlimited or limited liability legal status. Almost all sources of sole trade are also available to them. Major difference is that in limited liability, partner's liability is limited by their investment share unlike sole trade which owner's personal assets are also involved as guarantee. Sources are partners' investment, business loans, venture capitalist loan, or credit lines with banks.

Public Limited Company

This status of the company allows it to access money and capital market for various financing needs, apart from those sources which are also available to sole trade and partnership. A public company can raise huge funds by issuing common stock to general public. Besides this, they can also access to large capital loans from banks and other sources.

1.2 Explain the capital structure of the limited liability company you have selected and discuss why some companies prefer debt finance to equity finance.

There are many advantage of debt financing to equity financing. Debt financing offers the company tax shield by deducting the interest amount from income before taxes. 2ndly, it has been found out that cost of debt is lower than cost of equity in the long run. 3rdly, for equity financing, a company needs to fulfill many legal formalities which might not be possible for some companies so they go for debt financing which is less complex and require lesser legal formalities. Many companies are also opting for debt financing to avoid dilution of ...