Академический Документы
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A. Introduction.....................................................................................................................2
B, Contents..........................................................................................................................2
I, Task 1: Opening your own business – Hospitality and Tourism..................................2
II, Task 2: Pine Furniture PLC.........................................................................................4
1. Sources of finance available to Pine Furniture PLC...................................................4
1.1 Debt........................................................................................................................4
1.1.1 Leasing and hire purchase..................................................................................4
1.1.2 Overdraft.............................................................................................................5
1.1.3 Debentures and bonds........................................................................................5
1.1.4 Factoring............................................................................................................5
1.1.5 Government loan................................................................................................5
1.2 Ordinary shares.....................................................................................................5
1.3 Preference shares (preferred share)......................................................................6
1.4 Retained earnings..................................................................................................6
2. Assess the implications of the different sources of finance for Pine Furniture PLC...6
2.1 Debt........................................................................................................................6
2.2 Ordinary shares.....................................................................................................7
2.3 Preference shares..................................................................................................8
2.4 Retained earnings..................................................................................................9
III, Task 3.........................................................................................................................9
IV. Task 4.......................................................................................................................12
1. The importance of preparing Cash Flow Budgeting and Overtrading.................12
2, Cash Flow Budget..................................................................................................13
3, Cash shortages and surpluses...............................................................................14
C. Conclusion....................................................................................................................16
D. Appendix.......................................................................................................................17
1. Task 3.........................................................................................................................17
2. Task 4.........................................................................................................................18
E. Reference.......................................................................................................................19
E. Reference
A. Introduction.
Core businesses of Pine Furniture Public Limited (Pine Furniture PLC) are designing,
manufacturing and delivering furniture to customer’s door at unbeatable prices. With its 20-year
experience, Pine Furniture PLC would like to expand the business in Vietnamese market. In
order to do that, the company will need to raise 15 million pounds by considering several
financial options. It has to find a suitable source of finance so that Pine Furniture PLC could run
a success business in Vietnamese market. Besides, a cash budget must be carefully analyzed with
the aim of preventing risks for later process of the company. In addition, to any company or
organization, a careless plan will lead to series of financial risk to the company. That will express
how important the processes of making a financial plan for even a small company.
B, Contents.
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financial problems due to high inflation rate and weak management. Yet in the 2010, Vietnam
has been showing a rapid recovery movement in many financial sectors such as GDP (gross
domestic products), agriculture, forestry, fishery and tourism. In my chosen sector, Tourism,
there are many positive signs that confirm a business in this area will be very successful.
Tourism is a potential land for starting business because of it speedy enlargement in both
quantity and stability. For example, international visitors to Viet Nam in 9 months of 2010 were
at an estimate of 3,731,900, rose by 34.2% against in the same period last year. Of which,
visitors coming for tourist purposes went up by 43.3%; for business purposes by 39.8%; and for
visiting relatives by 2%. Beside, Vietnam’s GDP is expected to reach $102.2 billion in 2010, rise
6.7%, compared to the government’s target of 6.5%. Generally, GDP ratio of Vietnam is now
having an upward trend, promising gradual recovery in the next few years.
(www.veer.vn )
Overall, all of that information is obviously prove that Tourism industry in Vietnam is truly a
gold mine for who are willing to set the first step into business’s world like me.
When I have chosen the right sector, the next step is to select a type of the ownerships
including sole trader, partnership and limited company. Being a student seems to be the biggest
problem when deciding the appropriate ownership types. So what are the disadvantages of being
a student, who might be living with and supported by family? I will have to face up with two
mains tribulations: difficulty in finding source of finance and lack of experience. Partnership
ownership will be a perfect solution for my situation because of several advantages it brings:
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• Prospective employees may be attracted to the business if given the incentive to
become a partner.
• The business usually will benefit from partners who have complementary skills.
Finally, I have to verify the fitting source of finance for my business as a tourism
characterized company. The answer for my financial support seems to be included in the way I
choose type of ownership. There are several source of finance such as government aid, business
owner, borrowing from the bank, and others way of borrowing. In this case, raising capital from
business owners is the best way out because of my ability and its suitability for confirmed
ownership’s type as a partnership based company. This is kind of a small business so it does not
require too much financial resources, and I could afford by my own saving, borrowing from
parents or relatives and calling support from the other experienced partner. On the other hand, I
should have a legal agreement that sets forth how decisions will be made, profits will be shared,
disputes will be resolved, how future partners will be admitted to the partnership, how partners
can be bought out, and what steps will be taken to dissolve the partnership when needed.
1.1 Debt.
When someone has a debt, it means that he/she has an amount of money owned to
someone else (person or organization). In this case, debt is a term that is likely to reflect a form
of loan issued to the company by public or the banks. Moreover, in a financial view, debt may
include factoring, hire purchase, leasing, and venture capital. These debts will usually have to be
returned with an interest rate.
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Hire purchase is a type of installment credit under which the hire purchaser, called the
hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the
repayment of principal as well as interest, with an option to purchase. Under this
transaction, the hire purchaser acquires the property (goods) immediately on signing
the hire purchase agreement but the ownership or title of the same is transferred only
when the last installment is paid.
1.1.2 Overdraft
When an organization want to spend more money than it has in its current bank account,
this is called overdraft. Comparing to bank loan, bank overdraft is a short-term activity. It is also
limited by the quantity and time, interest rate is also different because the bank could apply a
daily rate to your debt. A business must consider its structure and purpose of profiting to decide
to use loan or overdraft, the former is for long-term and the latter is for short-term.
1.1.4 Factoring
Factoring is a method that enables a company or organization its accounts receivable to
another. When the company apply this method, it may feel too difficult to get the repayment
from debtor clients. Then it “sells” the debt to someone else with a price that equal to 80 – 85%
of the debt’s value, in return, the company will immediately receive cash to continue doing
business.
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1.3 Preference shares (preferred share)
Preference share which provides a specific dividend that is paid before any dividends are
paid to ordinary holders, and which takes precedence over ordinary share in the event of
liquidation. Like ordinary share, preference shares represent partial ownership in a company,
although preferred stock shareholders do not enjoy any of the voting rights of common
stockholders. Also unlike ordinary shares, preference shares pay a fixed dividend that does not
fluctuate, although the company does not have to pay this dividend if it lacks the financial ability
to do so. The main benefit to owning preference shares are that the investor has a greater claim
on the company's assets than common stockholders. Preferred shareholders always receive their
dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off
before common stockholders. In general, there are four different types of preferred stock:
cumulative preferred, non-cumulative, participating, and convertible.
2. Assess the implications of the different sources of finance for Pine Furniture PLC
Those four sources of finance available to Pine Furniture PLC are not always perfect, and
the company needs to consider between its benefit and risks. Those risks may be tax effects,
legal restrictions, dilution of control, bankruptcy, financial risks and so on.
2.1 Debt
The first thing to be considered when a company would like to issue debt is the concern
with dividends and tax rate for debts. In this case, Pine Furniture PLC should carefully study the
relationship between elements like tax rate, interest rate and cost of debt. The company has to
find a way to reduce the cost of debt based on its related issues. According to the Cost of debt
formula:
From the equation, we could easily realize that if the tax rate raises it will result in a
decreasing in Cost of Debt. So the company’s job is to choose the right moment, which will be
confirmed by current corporate tax rate, to issue new or more debts. For example, in the Pine
Furniture PLC’s cash flow information, it wants to issue debts (debenture) at a price of £1,000
per unit, corporate tax at 25%, interest rate at 12% per annum. Then we could calculate the Cost
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of Debt for this case is 9% compared to these of another case with higher corporate tax rate at
30%: 8.4%. By going through this example, it will be definitely confirmed that when the tax rate
goes up, the Cost of Debt goes down, and vice versa.
From the first view on Cost of Debt, it seems to be so easy for Pine Furniture PLC to take
control on issuing debt. Yet the company must keep an eye on financial risk and legal restrictions
when choosing debt as a source of finance. Rising fund by issuing debt is usually at a large
amount of money, Pine Furniture PLC has to carefully calculate its investments on even the
smallest issue. In Vietnam, if Pine Furniture PLC wants to issue debt, they have to meet some
requirements about company’s power in case the company cannot pay back for creditors. There
is a lesson for every company that if they want their business to be safe, they should be overly
dependent on debt. Moreover, Pine Furniture PLC should care about the legal restrictions of debt
in Vietnam. For instance, when financial problems occur, Pine Furniture cannot pay the interest
or root for the creditors, it has to master the restriction and law about the issuing of debt in case
of being sued. This emphasizes the issue that on any situation, Pine Furniture PLC has to pay for
interest on debt first whether they make profit or not, the failure to pay this interest may take the
company to a court. Even in the circumstance of bankruptcy, the company must do anything to
return money to creditors that play a role as the first priority of the company.
The action of issuing debt of Pine Furniture PLC does not only affect its own status but
also interfere with stakeholders, specifically its existing shareholders. Firstly, when bad
situations happen to Pine Furniture PLC, the company has to take paying debt as a priority.
Preference shareholders will be the next to receive fixed month (annual) dividends, ordinary
share may lose everything when Pine Furniture goes bankrupt.
But there is still one concern from Pine Furniture is that how tax adjustment affects on
the amount of shares they issue. The answer is ordinary share cost is not influenced by any kind
of tax rate so when calculating this figure, tax adjustment will not be required. But for Pine
Furniture PLC’s share holder, there is a tax called dividend’s tax that they have to keep an eye on
in case of tax arrears.
On the other hand, ordinary share’s holders is differentiated holders of other kinds of
share because they have the right in a legal way to vote to decide some important issues of the
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company such as business strategy, profit distribution, increase or decrease in the capital… Thus,
it is obvious that if Pine Furniture PLC has more ordinary shareholders, they accidently increase
the risk of the dilution of control in company’s management system. There still a solution to
prevent control’s dilution is centralizing decision making process based on the core of CEO.
Accordingly, the CEO of should hold as many shares as possible to maintain leader’s power as
well as focusing on issuing shares that only be available for limited quantity of potential investor.
If Pine Furniture PLC decides to issue more new shares (both ordinary and preference),
different perceptions will come up in shareholders’ mind. First, potential shareholders may think
that the Pine Furniture PLC is dealing with financial problem so it has to raise fund by the action
of issuing debt. Others may try to get more and more shares in order to receive extra dividend.
Anyway, issuing new share may cause a change in Pine Furniture PLC’s share price. Obviously,
the number of shares available in a given company is limited at any given point, and thus as
more and more shares are bought, the value of those shares automatically increases. Likewise
where those shares are sold and the market becomes flooded with one type of security, the value
falls. So Pine Furniture must control the number of shares issued in the stock market so as to
keep the price stable.
In addition, investment in ordinary shares is said to be risky rather than on preference
shares or credits. Because of the way about how dividends are paid in each occasion with debt,
preference and ordinary shares. Ordinary shareholders will be the last one to receive dividends in
the month or at any time confirmed by Pine Furniture PLC. If the company loses on the market,
there will be no dividend at the end of the year also because it is not compulsory to the company.
The worst situation is when Pine Furniture goes bankrupt, ordinary shareholders will lose
everything including their investments in the company without its responsibility.
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2.4 Retained earnings
Retained earnings are totally different from shares because those are influenced by tax
rate. The cost of retained earnings is proportional to value of tax rate. Then it is easy to
understand that shareholders only receive dividend when the cost the retained earnings are lower
than total value of the profit Pine Furniture PLC makes. When using this method, the only cost to
be mentioned is the opportunity cost without presence of other direct costs.
When the company makes profit, shareholders are the people who have the right to
decide what to do with that amount of money. There will be two ways, the first way is dividing
the profit according to the ratio of shares that each shareholder has, second way is that profit
earning will be retained as an investment in others new projects that may have the possibility to
bring back even more profit of the last season. Yet this solution should not be used as a primary
strategy, because when being carried out it requires collecting of so many shareholders
comments. Some investors may want to get more profit from projects, but the others may want to
receive their dividend to invest in their own projects that they think are more feasible to succeed
than those offered by Pine Furniture PLC.
III, Task 3
When investing in a company, investors are all expect high return. Cost of capital
measure the rate investors expect to earn from their investments. Pine Furniture PLC issues
shares, investors buy shares and become shareholders of the company, they hope to get profits.
Weighted Average Cost of Capital (WACC) is average cost of debt and equity that the company
has to pay. The higher WACC, the better it is. However, the company expects to obtain higher
return than WACC due to average cost.
There are four options that available for Pine Furniture PLC to raise £15,000,000 for its
business expansion:
For the first option, Pine Furniture PLC will issue 100% ordinary shares.
Option 1
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Table 1
This option has brought Pine Furniture PLC the highest Cost of finance leading to a very
risky position for such a new company in Vietnam. Moreover, the stock market is not always
stable, even not mention a careful consideration of investors when decide to buy shares from
what company. As a result, it is very difficult for Pine Furniture PLC Vietnam to attract potential
investors when it tends to carry out IPO. Thus, with a high proportion of ordinary shareholders,
Pine Furniture PLC, Vietnam has to pay a huge deal of dividends, which can lead to a significant
loss of the company’s profit.
Option 2
For second option, the company will issue 60% ordinary shares and 40% debentures.
Table 2
The second solution for Pine Furniture PLC, Vietnam’s financial planning offers the
leader board of the company a second highest cost of finance of about 19.77%. This can be a safe
option when the company issue just about 22.22% of debt. Yet it is still high in cost of capital
among 4 options.
Option 3
In this situation, Pine Furniture PLC will issue 50% ordinary shares and 50% preference
shares.
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Preference shares 9.1% 35,18519% 3.20185229%
Cost of Capital 18.95185112%
Table 3
For this case, the company will enjoy a very reasonable cost of finance at 18.95% without
the concern of debt’s interest payments. It seems to be a very good solution for the company to
raise fund for business expansion. When it makes profit, it will pay dividend for shareholders,
satisfy them and make them want to invest more and more to Pine Furniture PLC.
Option 4
With the last option, Pine Furniture PLC decides to issue 100% all of debenture with the
£1000 face value at 12% per annum.
Table 4
At first, it appears to be the most suitable solution for the company because of the lowest
cost of finance. But Pine Furniture PLC is a new company in Vietnam, it will be very risky when
issue a huge amount of debts. The total value of interest that the company has to pay annually
will be very much. If the business goes well, it will be a good enough solution, but when
problem occurs, it will be a disaster for the company because of the inability to pay for creditors.
So, Pine Furniture PLC must have a very careful consideration when choosing this option.
Personally, I think that the option 3 is the most suitable solution for Pine Furniture PLC.
Because its cost of finance is low enough to attract the possibility to be success. It values
18.95%, lower than option 1 and option 2. The last option seem to be very attractive but issuing
100% of debt is much precarious than 50% of preference shares and 50% of ordinary shares.
Like I have mentioned above, debt is a deadly trap for such a new company, in this case Pine
Furniture PLC, when entering Vietnamese market.
IV. Task 4
1. The importance of preparing Cash Flow Budgeting and Overtrading
Poor cash flow management is one of the reasons cited for any types of business failure.
To Pine Furniture PLC, the work of preparing Cash Flow Budgeting is the most important duty
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that has to be done before doing anything. Cash is the gasoline that help businesses run, Pine
Furniture PLC just need it like any others company. A well-prepared cash budget will tell the
CEO of the company about the way money moves into and out of his business; it is the
difference between just being able to open a business and being able to stay in business. A cash
flow analysis is a method of checking up on the firm’s financial health. It is the study of the
movement of cash through Pine Furniture PLC’s business to determine patterns of how it takes
in and pays out money. The goal is to maintain sufficient cash for firm operations from month to
month.
In addition, cash flow budget will help the CEO determine the cash shortage of each
month in order to apply appropriate adjustment. For instance, if your cash flow turns negative for
any one month, you will have to borrow money for that month from family or friends, investors,
or from a bank or other financial institutions. Then, if your cash flow is positive the next month,
you can repay that loan, that’s adjustment for cash flow. Besides, the CEO may also set a target
and determines the minimum closing balance for each month or quarter as well.
Cash Flow Budget preparation as well as overtrading is very important element that
included in Pine Furniture PLC, Vietnam’s financial planning. Overtrading occurs when the
company is too hasty in expanding business’s operation. If a company becomes overtraded, it is
likely to face up with liquidity problems and running out of working capital. As a result,
financial management is very important for Pine Furniture PLC, Vietnam to prevent unexpected
severe condition to company’s finance.
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II Cash outflows
Key equipment &
1 1,000,000
machinery
2 Sawing machine 500,000 500,000
3 Salaries 112,500 123,750 136,125 149,737.5
4 Building rental 7,500 7,500 7,500 7,500
5 Material Cost 375,000 412,500 453,750 499,125
6 Overhead 45,000 54,000 64,800 77,760
7 Tax 25,000 25,000
8 Advertising 75,000 75,000 75,000
9 Other costs 37,500 45,000 54,000 64,800
Total cash outflows 2,077,500 742,750 791,175 1,398,922.5
III Net cash flows (2,002,500) (465,250) 29,325 (414,322.5)
1 Opening balance 3,000,000 997,500 532,250 561,575
2 Closing balance 997,500 532,250 561,575 147,252.5
Table 5
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Figure 1: Net Cash Flow
As can be seen in the figure, the net cash flow of the 1st quarter is the lowest value among
4 quarters. It could be explained because this is the first quarter that Pine Furniture PLC runs in
Vietnam, it has to spend on many assets such as Key equipment & machinery (£1 million) and
Sawing machine (£500,000). These are compulsory spending for a company operating in such a
new market, it is easy to understand that the company has to prepare for an enormous costs for
several starting months. Moving to next 2nd quarter, the company has shown a leap in net cash
flow, about 4.3 times lower than these of the first quarter. From this quarter, Pine Furniture PLC
starts paying tax, advertising costs and increasing amounts of salaries, material cost… but this
company still makes enough profit to reduce negative net cash flow. There are several reasons
for this increasing in profit, first, the brand of Pine Furniture becomes more familiar to
Vietnamese customers leading to a higher level of demand. This trend is followed by the next
quarter, 3rd quarter even has positive net cash flow (£29325). Pine Furniture PLC has caught
needs and wants of customer to get the attention of them and become a popular brand in
Vietnam. This is a very good sign for Pine Furniture PLC because more customers mean
facilitating the future business of the company. On the other hand, the last quarter shows a
decreasing trend of cash flow. It is easy to understand that because of the 50% cash for buying
sawing machine has to be paid in this 4th quarter. Besides, rapid increasing in salaries and
material cost, overhead and miscellaneous costs make the value of net cash flow negative again
(-414,322.5).
Cash sale is one of the most important figures that the CEO of Pine Furniture PLC
Vietnam concerns. It could be said that cash inflow is the main supporting for the company, and
Pine Furniture PLC has a very positive sign when the cash inflow boosts steadily through the
year. This is clearly shown in the chart below:
The chart shows a positive theme for cash inflow of the year 2011 of Pine Furniture PLC.
It is obvious that the figure will continue to rise. This is a positive sign while cash out flow is
much more fluctuated which can be seen in the following chart.
This Cash outflow is the cause for negative net cash flow in 1st quarter, 2nd quarter and 4th
quarter. Pine Furniture has to apply new strategies that suitable for the recent company’s
situation such as trade credit, debt collection policies, discount policies, bank loans… For
example, at the first quarter, the cost of new equipments and machine are too high, and the
company could apply the trade credit method to reduce initial investment. By this way, the cost
will be divided in smaller reasonable parts spread out in 4 quarters. In addition, bank loans is
also a good way to make up for the loss of the company in a quarter, this loan could be returned
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with the profit of the next quarter. By applying fluently these methods, Pine Furniture PLC could
ease cash shortage in the first year it runs in Vietnam.
C. Conclusion.
In summary, when a company first steps in a new market, it has to face many obstacles.
Pine Furniture PLC must wisely deal with some problems from the initial step of finding
appropriate source of finance for the company such as risk, dilution of control, financial, legal,
and bankruptcy. Besides, financial planning is also very important to the company when building
cash flow budget and choosing suitable option to raise money for business expansion. Pine
Furniture PLC is an expected company with positive prospective in future to grow, gain market
shares in Vietnamese market.
D. Appendix
1. Task 3
*Cost of finance:
Cost of debt = Interest x (1-tax)Market value of debt x 100 = £1000 x 12% x (1-25%)£1000 x
100 = 9%
Cost of ordinary share = given Cost of equity for Pine Furniture PLC = 24.3%
Cost of preference share = DividendsMarket value of share x 100 = £5£55 x 100 = 9.1%
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Before new venture:
= £12,000,000
After venture:
WACC of ordinary share = Cost of ordinary shares x Weight of ordinary share = 24.3% x
64.81481% = 15.74999883%
WACC of preference share = Cost of preference shares x Weight of preference share = 9.1% x
35.18519% = 3.20185229%
2. Task 4
The way to calculate net cash flows, opening balance, and closing balance
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Take example for the 1st quarter, calculation for other quarters is similar to it.
Closing balance for the 1st quarter = Net cash flows + Opening balance
Closing balance for the 1st quarter is opening balance for 2nd quarter, closing balance for 2nd
quarter is opening balance for 3rd quarter, and so on. Thus, the closing balance for the last quarter
is £147,252.5
E. Reference
1. BPP Professional Education, 2004, Managing finance resources and decisions, 1st edition,
Aldine House, London.
2. Vietnam Business News, retrieved 2010, from the article Economic situation in nine months
of 2010: http://vietnambusiness.asia/economic-situation-in-nine-months-of-2010/
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