Abstract

Before selecting the proper financing sources Knowing the costs of financing is a
prerequisite. This assignment is regarding the financing issues of business. it is very
necessary to have proper knowledge over the financing terms and methods to obtain requisite
financing for the organization. One has to know the costs of financing as a prerequisite before
selecting the proper financing sources. In this assignment, several advantages and
disadvantages are discussed for different financing methods, cost of finance, financial
planning and information and many other issues that help to gain a proper knowledge about
the financing in organization. Different books and journals have been used to prepare the
assignment.

Contents
Introduction ............................................................................................................................................ 5
Requirement 1 ........................................................................................................................................ 6
Task 1.1 : Business needs finance and available sources of finance to a business ............................ 6
Equity financing............................................................................................................................... 6
Debt Financing ................................................................................................................................ 6
Lease Financing ............................................................................................................................... 7
Task 1.2 : Accessing and comparing the implication of the different sources of finance ................. 7
Implication of equity financing ....................................................................................................... 7
Implication of debt financing .......................................................................................................... 7
Implication of lease financing ......................................................................................................... 7
Task 1.3: evaluation of the appropriate sources of finance for the above mention businesses. ....... 7
M1: Critically evaluate each available sources of finance to that particular firm. Evaluation should
include the pros and cons, and legal aspects of each source. (Merit M1). ........................................ 7
Case study 1: An engineering firm .................................................................................................. 7
Equity financing for this firm........................................................................................................... 8
Debt financing ................................................................................................................................. 8
Lease financing................................................................................................................................ 8
Case study 2: Individual financing ................................................................................................... 8
Equity financing for this firm........................................................................................................... 8
Debt financing ................................................................................................................................. 8
Lease financing................................................................................................................................ 8
Case study 3: Large plc. ................................................................................................................... 8
Equity financing for this firm........................................................................................................... 8
Debt financing ................................................................................................................................. 8
Lease financing................................................................................................................................ 8
Case study 4: Local Do It yourself firm ............................................................................................ 9
Equity financing for this firm........................................................................................................... 9
Debt financing for this firm ............................................................................................................. 9
Lease financing................................................................................................................................ 9
Case study 5: Rugby club................................................................................................................. 9
Equity financing for this firm........................................................................................................... 9
Debt financing ................................................................................................................................. 9
Lease financing................................................................................................................................ 9

Requirement 2: ....................................................................................................................................... 9
Task 2.1 : Analysis of the costs of different sources of finance review ......................................... 10
Cost of equity financing ................................................................................................................ 10
Cost of debt financing ................................................................................................................... 10
Cost of lease financing .................................................................................................................. 10
Task 2.2: Reviewing the importance of financial planning .............................................................. 10
Task 2.3: Explanation of the importance of information for the process of decision making ......... 10
M2: Discuss the real life firm example of a firm and briefly explain how that firm uses information
for making an investment decision (Merit M2). ............................................................................... 11
Task 2.4: Explain how various sources of finance appear in different financial statements. ........... 11
Equity financing in financial statements ....................................................................................... 11
Debt financing ............................................................................................................................... 11
Lease financing.............................................................................................................................. 11
Requirement 3: ..................................................................................................................................... 11
Task 3.1: Explaining how financial decisions are based on budgeting ............................................. 11
Task 3.2: Explain by calculating the unit costs and make pricing decisions using relevant
information. ...................................................................................................................................... 12
Task 3.3: Comparing the investment appraisal approaches by showing calculation output. .......... 12
Analysis of the investment decision by Payback period ............................................................... 12
Analysis of the investment decision by Net Present Value ........................................................... 12
Decision ......................................................................................................................................... 13
Requirement 4: ..................................................................................................................................... 13
Task 4.1: Reviewing the main financial statements .......................................................................... 13
Statement of comprehensive income ........................................................................................... 13
Statement of Financial Position .................................................................................................... 13
Statement of cash flow ................................................................................................................. 13
Statement of changes in equity .................................................................................................... 13
Task 4.2: Creating and comparing the appropriate formats of financial statements for different
types of business. .............................................................................................................................. 13
Statement of Comprehensive income .......................................................................................... 14
Statement of financial position ..................................................................................................... 14
Statement of changes in equity .................................................................................................... 14
Examples of 2 real life companies are here. ................................................................................. 14
Financial Statement of David Jones .............................................................................................. 14
Financial statement of Myer Holdings .......................................................................................... 15

Task 4.3: Interpretation of financial statements of given firm using appropriate ratios for
profitability, liquidity, efficiency and investment; and estimate the formulas for both internal and
external comparison. ........................................................................................................................ 16
Measurement Ratio ...................................................................................................................... 16
Profitability ratio ........................................................................................................................... 16
Liquidity ratio ................................................................................................................................ 17
Activity / efficiency ratio ............................................................................................................... 17
Interpretation of ratios ................................................................................................................. 17
Examples of 2 separate firms and interpretation about their ratios. .............................................. 17
Activity Ratios ............................................................................................................................... 17
Interpretations .............................................................................................................................. 18
Liquidity Ratios .............................................................................................................................. 18
Interpretations .............................................................................................................................. 18
Solvency Ratios ............................................................................................................................. 18
Interpretations .............................................................................................................................. 19
Profitability Ratios ......................................................................................................................... 20
Interpretation of Profitability Ratios............................................................................................. 20
Conclusion ............................................................................................................................................. 20
References ............................................................................................................................................ 21

Introduction
Some factors of production such as Capital, Human resource, land and entrepreneurs
dominate any kind of business whether it is service oriented or production oriented. Any kind
of business involves these factors of production. Adequate financing or supply of money
which is termed as capital is the foremost thing on which other factors depend. Capital is
the mainly important thing in business because only adequate finance can make sure that the
business is running smoothly.
This assignment contains financing issues of business. Having properly sufficient knowledge
over the financial terms and different methods is very necessary to obtain requisite financing
for the organization. An owner has to select the proper financing sources, but before that
knowing the financing cost is a prerequisite. One has to create a proper plan and budget if
wants to ensure proper working capital and minimize the cost of capital. This assignment

shows advantages and disadvantages for different methods of finance, cost of finance,
financial planning and information and other issues which bring knowledge about the
financing in organization. In this assignment information are collected from different books
and journals.

Requirement 1
Task 1.1 : Business needs finance and available sources of finance to a business
Several factors are considered as primary to operate or run a business whether it is
production based or service based. According to Gitman & Mcdaniel (2008) there
are 4 mandatory factors of production are

Capital

Human resource

Land and

Entrepreneurship.

Proper capital is the first and foremost thing to continue the production or to operate a
business. Owners are not always able to manage the required capital by themselves. Rather,
they have to collect their required capital from different sources. Business needs financing
to be run and that is obvious.

According to Ross et al. (2010), there are of 3 types of financing.

Equity financing
Equity financing refers to collecting money from different sources and the financers will be
given a portion of the ownership. It involves1. initial public offering
2. repeat public offering
3. Personal saving etc.

Debt Financing
Collecting money by taking loan for business is called debt financing. This contains1. Debt from kith and kin.
2. Bank loans.

3. Debt from different financial institutions.

4. Bonds.
5. Collecting money from investment organizations.
Lease Financing
In this type capital is formed by acquiring machineries or assets as a form of financing.

Task 1.2 : Accessing and comparing the implication of the different sources of
finance
Different financing sources implicate differently. The implications areImplication of equity financing
Equity financing provides ownerships to different financers and thus raise finance and it is
beneficial for the organizations. Owners share the profit and loss in this way. If there is
profit, different shareholders will earn their portions from the total profit. When there is
zero profit owners wont get dividend.
Implication of debt financing
Debt financing has some benefit though it increases cost for the organization. There may be
loss or profit, but firms are bound to pay a fixed portion of interest to the debtors. Collaterals
needed for debt financing (Prasanna & Prasanna, 2011).
Implication of lease financing
In Lease financing machine or non-current assets are taken as lease and there is payment for
the asset on an installment basis which helps to increase capital. Interest or cost of financing
can be included in installment.

Task 1.3: evaluation of the appropriate sources of finance for the above mention
businesses.
M1: Critically evaluate each available sources of finance to that particular firm.
Evaluation should include the pros and cons, and legal aspects of each source.
(Merit M1).
Case study 1: An engineering firm
To obtain capital of 540,000 (in the form of machineries & building) lease financing is
suitable for this engineering firm. The implication of each of the financing sources is as
follows for this case-

Equity financing for this firm

For this case Equity financing may require more time and legal procedures. It may have to go
a long way for this equity financing If the company is not listed in the stock exchange.
Debt financing
Debt financing may be suitable for this firm although the higher cost of interest rate may
affect its performance.
Lease financing
As the repayment in installment basis will help the firm to get rid of lump sum payment, lease
financing is suitable for this firm.
Case study 2: Individual financing
As he requires more $110,000 (180000 70000) capital debt financing is suitable for the
individual. The implication of each of the financing sources is followingEquity financing for this firm
As he is not a company equity financing is not available for this person. He may go for
partnership. That will require some legal procedures.
Debt financing
Debt financing is suitable for this person where debt financing from relatives, friends, banks
or any investment institutions can help to establish business.
Lease financing
As he will purchase a land lease financing is not available for this person.
Case study 3: Large plc.
Equity financing will be considered as suitable for this firm. The implication of each of the
financing sources is as following for this caseEquity financing for this firm
As it is a large plc. And require $4.5 million of capital equity financing is suitable for this
firm.
Debt financing
Debt financing can be suitable for this firm, but the higher cost of interest rate may affect its
profitability.
Lease financing
As it will procure a site lease financing is not available for this company.

Case study 4: Local Do It yourself firm

Debt financing suits this local firm. The implication of each of the financing sources is as
followingEquity financing for this firm
Equity financing is not suitable for this firm because it is a local firm and has to go a long
way for legal procedures for equity financing.
Debt financing for this firm
Debt financing suits this firm, as it needs to increase working capital for the business.
Lease financing
As it have to increase working capital lease financing may not be suitable for this entity.
Case study 5: Rugby club
In the case of rugby club equity financing from the member is a suitable financing source.
The implication of each of the financing sources is as follows Equity financing for this firm
As it is a club and require $550000 of capital equity financing from the club members is
suitable for this firm
Debt financing
As the higher cost of financing may cause loss for the club debt financing may not be suitable
for this club
Lease financing
Lease financing is not available for the club will improve the grounds.

Requirement 2:

Task 2.1 : Analysis of the costs of different sources of finance review

Different type of sources of financing involve different type of costs. Such as
Cost of equity financing
In Comparison of other sources Cost of equity financing is lower. Here, different
shareholders will earn their portions of total profit and when there is loss business will not be
need to pay dividend.
Cost of debt financing
A fixed and higher amount of interest is to be paid in Debt financing irrespective of loss or
profit in business. So, compared to equity financing cost of debt financing is higher.
Cost of lease financing
Lease financing has an advantage. It reduces the risk to pay at single time because it involves
higher interest rate but still it is payable on the basis of installment.

Task 2.2: Reviewing the importance of financial planning

Organizations need proper financial planning. Here are some reasons1. to get idea about the required capital and working capital
2. to estimate the cost of capital
3. to prepare a fruitful budget
4. to reduce the cost of capital (Chandra, 2005)
5. to select the best source of financing

Task 2.3: Explanation of the importance of information for the process of

decision making
Knowing or collecting information is a very important task. Here are some reasons1. To know the background of any task in organization information plays a very
important role as Information provides background.
2. Information provides the knowledge about the profitability of any task in organization
3. Information helps to make proper decision.
4.

To assess and evaluate the performance for any specific activity information is

obviously needed.

M2: Discuss the real life firm example of a firm and briefly explain how that firm
uses information for making an investment decision (Merit M2).
We suppose, a firm named X is trying for its business expansion and 3 areas are chosen.
These 3 areas are F, G and H. The manager of the firm X has to select one of the these
options. The decision will be taken on the basis of some information. Information about the
numbers of customer, buying capacity of them, their social standard or class and the probable
demand in these regions will help to take the appropriate decision in case of investment. So,
without information, an appropriate decision cant be made which will bring benefit for the
organizations.

Task 2.4: Explain how various sources of finance appear in different financial
statements.
Equity financing in financial statements
Equity financing has been shown in the liability part as the equity of the organization. Equity
can be shown as shareholders equity in the Statement of Financial Position.
Debt financing
Debt financing has been shown in the liability part as the debt or long term / short term loan
of the organization (Chung, et al., 2010). Debt can be shown as loan from bank/ financial
institutions or other sources in the Statement of Financial Position.
Lease financing
Lease liability has been shown in the liability part of the Statement of Financial Position.
Lease repayment has been shown in the statement of Comprehensive Income and in the Cash
flow statement.

Requirement 3:
Task 3.1: Explaining how financial decisions are based on budgeting
Budgeting refers to making a financial plan for any future activity. Of course, financial
decisions in organizations are taken based on budgeting. Budgeting influences the financial
decisions because1. future cash inflow and outflow should be estimated to take Financial decisions
2. budgeting includes information about profitability which will be needed for taking
Financial decisions
3. taking financial decisions demand having knowledge about the viability of any
activity which is discussed in budgeting.

Task 3.2: Explain by calculating the unit costs and make pricing decisions using
relevant information.
G Ltd has the following information of productionFixed cost = $100000
Variable cost = $20 per unit
Number of production = 10000 unit
So, per unit cost = (100000 / 10000) + 20
= 30 per unit
So, total production cost is $30 per unit. If the profit margin is 20%, the price of the
product will be = 30 120% = $36

Task 3.3: Comparing the investment appraisal approaches by showing

calculation output.
An investment decision is to be taken based on some analysis, in this task.
Analysis of the investment decision by Payback period
Payback period for the investment = (1000 / 200) = 5 years
So, the payback period is 5 years for this investment.

Analysis of the investment decision by Net Present Value

1 (1 + I)-n
NPV = R
Initial Investment
I

= 200 {1 (1 + .1) -6} / .1 1000

= 200 4.35 1000
= 871 1000
= -129
Note: 10% rate of interest has been taken for calculation

Decision
Based on the above Payback period and NPV calculation, I will suggest not to take the
investment opportunity as it generates negative NPV and take long time to get the invested
amounts.

Requirement 4:
Task 4.1: Reviewing the main financial statements
To provide the material information about the financial performance of the organization
Financial statements are prepared. In accordance with IAS 1: Presentation of Financial
Statements, there are 4 components of financial statements.
Statement of comprehensive income
This financial statement includes all kinds of income and expenses such as, gross profit,
operating profit, net profit, EBIT etc.
Statement of Financial Position
Statement of Financial Position which previously called as Balance Sheet includes the assets
and liabilities of an organization.it represent the financial position of an organization in a
point of time (IAS-1, 2007).
Statement of cash flow
All the cash inflow and outflow of an organization during the financial year is included in the
statement of cash flow.
Statement of changes in equity
This financial statement includes the information showing the financial information about the
changes in owners equity.

Task 4.2: Creating and comparing the appropriate formats of financial statements
for different types of business.
Different types of financial statements are related with different types of business. The
types and formats are briefly discussed here-

Statement of Comprehensive income

Statement of comprehensive income is suitable for company and may be named as income
statement for small organizations as it was named previously.
Statement of financial position
statement of financial position was called as balance sheet Previously and for all kinds of
business This remain same.
Statement of changes in equity
it includes information about the ownership and owners equity of the organization. So, this is
applicable for companies.
Examples of 2 real life companies.
Financial Statement of David Jones
David Jones is a famous clothe retailer around the world. A financial statement of David
Jones is shown as below-

Financial statement of Myer Holdings

A sample of Myer Holdings financial statement is shown below which is a famous large
department store group.

Task 4.3: Interpretation of financial statements of given firm using appropriate

ratios for profitability, liquidity, efficiency and investment; and estimate the
formulas for both internal and external comparison.
Measurement Ratio
To determine the performance irrespective of the monetary value and help to compare
themselves with the other competitors in the industry Ratio analysis helps.
Profitability ratio
Profitability ratio for this entity is shown as below-

Profit margin = net profit / net sales = 2000 / 7000 = 0.285 = 28.5%
Return on asset = net income / total asset = 2000 / 18000 = 0.11 = 11%
Liquidity ratio
Liquidity ratio for this entity is as followsCurrent ratio = current asset / current liability = 13000 / 6000 = 2.16 times

Activity / efficiency ratio

Activity ratio for this entity is following Asset turnover ratio = net sales / total asset = 7000 / 18000 = 0.38
Interpretation of ratios
The performance of the company is satisfactory according to the ratio above, having good
profitability with a higher profit margin of 28%. The current ratio that is of 2.16 times is also
satisfactory. In terms of liquidity condition this indicates a satisfactory performance. with an
asset turnover ratio of 38% Efficiency of the organization is also good.

Examples of 2 separate firms and interpretation about their ratios.

Activity Ratios
How quickly a firm converts non-cash assets to cash assets activity ratios measure that and
also reveals the ability of the organization to convert its non-cash assets to cash assets.
Activity Ratios
David Jones

Myer Holding

Inventory turnover

1.40

1.72

Days of inventory on hand (DOH)

261

212

Receivables turnover

2.19

2.05

Days of sales outstanding (DSO)

167

178

Payables turnover

1.82

1.72

Number of days of payables

201

212

Fixed asset turnover

2.14

1.07

Total asset turnover

0.44

0.47

Interpretations
Compared to Myer Holdings in terms of activity ratio David Jones has better performance.
We find better receivable turnover, inventory turnover as well as fixed asset turnover for
David Jones compared to Myer Holdings and also The payable turnover ratio is satisfactory
for David Jones compared to Myer Holdings.

Liquidity Ratios
The availability of cash to pay debt is measured by Liquidity ratios . The liquidity ratios of
this company is calculated Liquidity Ratios
David Jones

Myer Holding

Current ratio

7.91

5.34

Quick ratio

3.04

2.71

227

178

Additional Liquidity measure

Cash conversion cycle

Interpretations
In terms of liquidity ratio David Jones has better performance compared to Myer Holdings.
Compared to Myer Holdings we find better current ratio and quick ratio for David Jones. The
cash conversion cycle is also satisfactory for David Jones.
Solvency Ratios
Ratio name

Particulars

Amount

Ratio

Amount

Ratio

output
David Jones

Debt ratios

Debt to assets Total debt 231577650

Total assets

ratio

Myer Holding
0.13

1713999860

Debt to capital Total debt 231577650

206302341

0.09

2281584596

0.15

(total debt + 1466529613

ratio

output

206302341

0.10

2048344598

shareholders
equity)
Debt to equity Total debt 231577650
shareholders

ratio

0.18

1234951663

206302341

0.11

1842042258

equity
Financial

Average total 1531014483

leverage ratio

asset

1.33

1144018690

1994192228 4.34
459295268

average total
equity
Coverage ratios
Fixed

charge (EBIT

coverage

+ 206359974

Lease
payments)

1131636

182.35

459522631

2021.0

227363

97

(Interest
payments

Lease
payments)

Interpretations
In comparison with Myer Holdings David Jones has better performance in terms of solvency
ratio. We find better Debt to capital ratio, debt to assets ratio, and financial leverage ratio for
David Jones compared to Myer Holdings. The debt to equity ratio is also satisfactory for
David Jones.

Profitability Ratios

Profitability Ratios

David Jones

Myer
Holdings

Return on Sales
Gross Profit Margin

35.57%

35.41%

Operating Profit Margin

31.37%

29.90%

Pre Tax Margin

28.58%

27.17%

Net Profit Margin

27.12%

24.34%

Return on Investment
Operating ROA

13.84%

15.53%

ROA

11.96%

12.64%

Return on Total Capital

14.40%

17.59%

ROE

15.55%

16.91%

Interpretation of Profitability Ratios

In terms of profitability ratio David Jones has better performance compared to Myer
Holdings. We get better Debt to net profit margin and pre-tax margin for David Jones
compared to Myer Holdings. Compared to David Jones ROE and ROA is higher for Myer
Holdings.

Conclusion
Financing is the major concern for the organizations. To understand the performance, to
measure the performance, to select the best suitable financing method and finally to take
the proper actions, financing and budgeting is quite essential to the organizations.

References
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Journal of Financial and Quantitative Analysis, 45(2), pp. 265 - 291.
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