Name: Mohammed Faris Kizhakkay Pattuthodi

Student ID: 0007VMNVMN0417

Program: MBA-SEMESTER 1

Subject: Financial Analysis and Management

Lecturer: Mr Kenneth

Task Assignment 2

I declare that this assignment is all my own work and that I have acknowledged all materials
used from the published or unpublished works of other people. All references have been duly
cited.

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Contents
1.0 EXECUTIVE SUMMARY......................................................................................................3
2.0 INTRODUCTION.........................................................................................................................3
3.0 METHODS OF FUNDING...........................................................................................................4
3.1 ISSUE OF SHARES...............................................................................................................4
3.1.2 EQUITY..............................................................................................................................4
3.1.2 PUBLIC OFFERING.........................................................................................................6
3.2 PREFERENCE SHARE................................................................................................7
3.3 DEBENTURES.............................................................................................................10
3.3.1 Convertible and non-convertible debentures..................................................................10
3.4 LOANS...................................................................................................................................12
3.4.1 BANK LOAN....................................................................................................................12
3.4.2 TERM LOAN....................................................................................................................12
4.0 FINANCING AND INVESTMENT DECISION.......................................................................13
5.0 CONCLUSION............................................................................................................................14
6.0 BIBILIOGRAPHY......................................................................................................................15

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1.0 EXECUTIVE SUMMARY

This report deals with the financing and investment decision that are needed while
acquiring the shares of an unlisted company. The report critically evaluate the pros and cons
of different types of funding such as issuing shares, debentures, loans and public offering.
Acquiring a company increases in building up the strength and expanding the company. This
also helps in increasing the value of the shareholders and bringing profit and goodwill to the
company. While acquiring a company a thorough analysis should be conducted about the
different methods and decisions regarding financing and investing.

2.0 INTRODUCTION

AB plc is a listed company and it plans on expanding its business to a new

geographical region by purchasing an unlisted company and thereby acquiring it. Since the
company is not able to raise the fund from its internal sources, the company is planning on to
look for other sources of funds suitable for the company for acquisition. Funding methods
such as issuing equity, offering for the public, issuing preference shares, debentures and loans
are used here to acquire the company. Different methods are critically analysed so that the
board of directors of the company can have a better understanding on their investment and
financing decision.

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3.0 METHODS OF FUNDING

The methods that are going to be used in funding the AB plc while acquiring the new
properties are issuing of shares, preference shares, debentures and loan from banks and other
financial institutions.

3.1 ISSUE OF SHARES

3.1.2 EQUITY

Equity is the value of an ownership concern is a property, stockholders equity, in business.

Equity or stockholders equity is a part of total capital of a business.

Equity financing is a method by which capital is raised by the sale of stock of a company to
the investors. Ownership interest are sold to raise and collect funds for business purposes.
.As a return of their investment, the stockholders obtains the ownership interests of the
company.

Equity is the worth of an asset less the total amount of liabilities on that particular asset. It is
represented with the equation:

Equity = Assets Liabilities

For AB plc to acquire the unlisted company, there is a need of additional source of capital.
This can be obtained by using equity financing. Equity financing is basically the sale of the
stock of the company and giving the investors the ownership in exchange of cash. The
percentage of the company that will be sold in equity financing usually depends on the
amount the owner has invested in the business and what the investment is valued at the time
of financing.

When a company or a business decides to do equity financing to meet their liquidity needs for
expansion or diversification purpose, it has to make list in which the financial details of the
business needs to be mentioned. The company need to state their plans about the funds raised.

Advantages of equity financing

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 Less Burden: Equity financing lowers burden in a way that there is no repayment of
loan or other borrowings. The company is not required to make any loan payment
monthly. Equity financing is central to any business that plans of expanding as they
wont be able to generate profit initially. This also helps to channel more currency into
the growth of a business
Credit issues gone: In cases where the business lacks solvency or creditworthiness due
to lack of a good financial record or poor credit history, equity financing is preferred
over debt financing and it is more suitable too.
Learn, gain from partners: Sometimes informal partnerships will be formed with more
experienced or knowledgeable individuals with equity financing. And some might be
well linked too. And thus the business is likely to benefit from their business network
and their knowledge.
Like rest of the existing shareholders, the new investors will also have interest in the
growth, profitability, increase in value and success of the business.
As the business grows, investors are also ready to offer follow-up funding.

Disadvantages of equity financing

Share profit: the profit needs to be shared as the investor will be expecting it because
they deserve it. It could be a valuable interchange if there is benefit from the worth
they bring along as a financial backer or their business experience and business
acumen.
Loss of control: the price to be paid for equity financing and the all of its possible
advantages is that one need to share the control of the company.
Potential conflict: while sharing the ownership and working with others, it may lead
to conflict or some tension if there are differences in management style, vision or in
the way a business is run.
Raising Equity finance can be costly, time consuming, demanding and it may even
take the focus of the management from main business activities.
There is a chance of losing a particular amount of authority to make management
decision depending on the investors.
To provide information to the investor for monitoring activities, management time
have to be invested.

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 When promoting investments and raising finance, the business may have to comply
with legal and regulatory issues.

3.1.2 PUBLIC OFFERING

Public offering can be defined as offering of the securities of a business entity or corporation
to public. The securities that are offered to the public need to be listed on the stock exchange.
Public offering generally requires the company that issue the shares to publish a prospectus
specifying the rights and terms attached to offered security, and the information about the
company and its finances.

Initial public offering is a type of public offering. All public offerings arent IPOs. It occurs
when a company is offering its shares first time for public trading and ownership and thereby
changing it into a public company. Public offering can be done by companies that have been
previously listed too.

Public offering is another way with which AB plc can gather funds for acquiring and
expanding its new business. There are certain benefits and drawbacks for public offering just
like a business have its profit side and risk side. Public offering helps in enhancing the market
value of the company as people can access the information about the company readily.
Investors are better off investing in a public company rather a private company. Shareholders
get a liquidity advantage in public offering in case they want to sell off their shares for any
personal use, its easy. So through public offering, AB plc can gather large amount of funds.

Advantages of public offering

Better market value: evaluation of company listed as public is high than a company
that is owned privately. This is due to the quick availability of company info for the
public to determine the value.
Improved company image: if the positioning strategy and marketing strategy is
perfect, the image of the company can increase at a high rate when its public listed, in
the zone of branding and confidence level to many shareholders.

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 Human assets: company will be capable to draw and retain good employees with
schemes like career advancements and share option.
Acquisition: for acquiring other businesses, publicly traded shares can be used to
make payment by public listed company.
Collaterals: stockholders pledge their shares to banks and other financial institutions
as collateral for specific financing activities. These institutions accept the shares as
collateral due to the nature of getting publicly traded.
Liquidity improved to stockholders: shareholders can sell their shares easily if the
need liquidity for any personal purposes.

Disadvantage of public offering

Transparency: the compulsory reporting requirements asks to disclose the information

publicly, with this the sensitive business information are made available to the
competitors, customers and employees.
Vulnerable to takeover: the power is diluted because the shares are traded publicly
and the company is exposed to fears of take over as the ownership of the company is
reduced.
Pressure: for a public listed company, the pressure over the performance is too high
because the time is less for the investors to make decisions. The deadlines are periodic
so there is going to be pressure on financial reporting and sales.

3.2 PREFERENCE SHARE

Preference share are those shares of a companys stock with dividends which are to be paid to
the stockholders before the common stock dividends are issued. In cases like a company
going bankruptcy, those stockholders who have preferred stock are to be paid off first from
the company assets. Preference share usually have fixed dividend, but the common stocks do
not have fixed dividend. Unlike common shareholders, preference shareholder doesnt hold
any voting rights. These shares are ideal substitutes for investors who are risk-averse.

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Preference shares are usually less unstable than normal shares and it offers a steady flow of
dividends to the investors. These shares are callable in nature; the person who issued the
shares can redeem the shares at any time and therefore providing to the investors more
choices than common shares. [CITATION CAS03 \l 17417 ]

Funds can be raised by issuing preference shares to the investors who prefer preference
shares over equity. Although it is an acquisition, some investors will be wanting to stay at the
safe side of the company and doesnt want to take any sort of risks. Even they dont get any
sorts of voting rights, the investors will be ready to come over and buy preference shares
without any hesitation than equity shares as it hold no risk. If AB plc is to issue more
preference shares, it can easily gather the amount required for funding the new acquisition,
but if the company isnt making much profits, AB plc will have to pay off dividends to the
preference shareholders from their assets. Due to features such as risk free, fixed dividends,
redeemable, and economical, AB plc will be able to fund their new acquisition with issue of
preference shares.

Advantages of preference shares

Suitable to careful investors: this is mostly suitable for those investors who are risk-
averse but likes getting fixed dividend.
Retention of control: the prevailing stockholders can recall their control over the
business by dispensing preference shares because they can only vote on the matters
that affect them. So there wont be any dilution of the control.
Attractive types: preference shares are convertible and redeemable and participating
preference shares are more striking and attractive. These are useful to investors very
much and thus they have a ready market.
Convenience: a charge on assets is created in situation of debentures, but as such is
not required in case of issuing preference shares.
Increase in equity owners income: while issuing preference shares, equity
stockholders are likely to earn a good dividend.
Satisfy legal requirements: sometimes the public deposits of certain companies will be
exceeding the maximum limit set by reserve bank, in such cases liquidation can be
done by the issue of preference shares.

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 Economical: financing of preference shares is less expensive compared to equity
shares. As a result it is issued to meet high capital expenditure.
Enables reorganisation and reconstruction: when a company is reconstructed or
reorganised, the debts can be converted into preference shares with the consent of the
board.
Increasing marketability: value of debentures and equity shares can be raised in open
market by utilizing preference shares.
Good substitute for debentures: companies with annual return and no stable income
for providing steady debenture interest could issue preference shares as a substitute to
the debentures.

Disadvantages of preference shares

Heavy dividend: preference shares usually carries a greater rate of dividend compared
to interest rate on debentures.
Dividend accumulation: in case of increasing preference shares, the outstanding of
preference share accumulates and it is a long lasting burden for the company.
Costly: financing preference shares is costly when compared with debentures.
No voting rights: preference share holders interest maybe spoiled by equity
shareholders because preference shares doesnt hold any voting rights.
Liquidation: sometimes the board will provide the preference shareholders with
dividend instead of using the limited cash for other productive purposes. This will
lead to insolvency in long run.
Financial status: with the presence of preference shares, companys creditworthiness
maybe be affected.
Redemption time: the preference shareholders will have to face loss if the board dont
redeem the preference shares during depression.
No income tax exemption: preference dividend isnt usually deducted for the purpose
of income tax, so the company have to earn more. If not, the equity shareholders
dividend will be affected.

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3.3 DEBENTURES

Debentures are a type of long or medium term debt format used by large companies in order
to borrow money. It needs to be paid back on a specific date just like a loan, but some of the
debentures are treated as irredeemable securities (perpetual debentures). Debenture is a kind
of debt instrument which isnt secured by a collateral or any physical assets. They are backed
by the reputation of the issuer and general creditworthiness. Governments and corporations
are seen to issue this kind of bond frequently to protect capital. [ CITATION Inv07 \l 17417 ]

Debentures are normally a common type of long-term loan which could be taken out by a
business entity. At a fixed interest rate, these loans can be normally repaid on a specific date.
Normally companies makes these payment of interest before paying out the dividend to the
shareholders, just like most of the debt instruments. Compared to other kinds of debt and loan
instruments, debentures have advantage in a way that they have a lower rate of interest and a
longer repayment period.

AB plc can source in money required for the purchasing the share of unlisted company by
issuing debentures. Issuing debentures is advantageous to the company because there is only
a low rate of interest that need to be paid and the prepayment period is really long and this
gives the company sufficient time to avail profits. Issuing of debenture is much cheaper
compared to equity and preference shares, there is no dilution of control too.

3.3.1 Convertible and non-convertible debentures

Convertible debentures are those debentures which can be converted into equity shares of
issuing entity after a particular period. Due to their ability to convert into equity shares,
investors are most attracted to this kind of bonds and they are most striking to the companies
because of their low rate of interest. [ CITATION Con09 \l 17417 ]

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Non-convertible debentures are those which cannot be transformed into equity shares of the
issuing entity. To match with it, the investors are compensated a higher rate of interest
compared to convertible debentures.

Advantages of debentures

Tax benefit: there is an interest expense from the part of the borrower while issuing
debenture. This is a tax deductible expenditure.
Cheaper source of finance: since debentures avails a tax benefit, this indirectly helps
in lowering the costs.
No dilution of control: the control of prevailing shareholders is not diluted while
issuing debentures.
The cost of issuing debenture is lower compared to equity shares and preference
shares.
No dilution in share of profits: debenture holders are liable to get the amount of
interest they agreed to. They do not share the profits of the company. [ CITATION
Efi09 \l 17417 ]
During inflation, issuing debentures can be advantageous.

Disadvantages of debentures

Rigid obligation: payment of interest to debenture holders is a legal obligation. Even

at time when a business doesnt have good cash flows, the interest needs to be paid at
time. It is not a right option of financing a business at nascent stage, as there are
chances of company going bankruptcy.
Increase leverage ratios: debentures increases the leverage of the business and it leads
to bankruptcy. Due to certain market conditions, the project costs may increase but the
interest payment does not change so as to compensate the increased costs.
There is no voting powers for debenture holders.

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3.4 LOANS

Another way to acquire funds is through loans. AB plc can get loans from banks and other
financial institution. The loans provided will have a maturity day within which the loans need
to pay back with a period fixed interest. Compared to debentures, the interest of loan maybe
higher depending upon the banks and financial institutions. There are business acquisition
loans for long terms.

3.4.1 BANK LOAN

Bank loans can be defined as the extension of funds from a bank to the needed party with an
agreement that the borrowed funds will be repaid. Banks usually provide loans at a particular
rate of interest, i.e. the borrower needs to pay a calculated percentage of principal amount to
the bank as a return for borrowing. These loans that are provided by the banks have maturity
date within which the borrower needs to repay the loan. Bank loans are also known as bank
advance. [CITATION Fin \l 17417 ]

The terms of loan need to be agreed by each of the parties involved in transaction prior to
exchange of property or money. If a collateral is asked by the lender, it needs to be mentioned
in the loan documents.

3.4.2 TERM LOAN

Traditional term loan is one of the common form of providing a loan to a business. The
borrower borrows a huge amount of money for the purpose of making the business happen,
and the money is paid back over a certain period of time, usually at a fixed rate.

These loans are common for business acquisition because they fits into the long term nature
and typical cost of purchasing a prevailing business.[ CITATION Fun13 \l 17417 ]

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Advantages

Set repayment structure

Monthly payment is lower than short term loans
Apt for wide variety of business activities
Payment terms longer than short term loans

Disadvantages

Payback schedule
Application process is lengthy
Possible prepayment penalties
Interest rates varies and may increase

4.0 FINANCING AND INVESTMENT DECISION

The aim of financing and investment decision is to increase the value of the shareholders.
Investment decision tells how to allocate the capital in the best way to maximize their values.
While financing decision tells how to finance for the expenses or investments. [ CITATION
Bou05 \l 17417 ]

Since AB plc is a listed company, while acquiring the shares of an unlisted company, it comes
a listed company. Since the unlisted company is asking for 25% of the market capitalisation,
acquiring it will give more value to the prevailing stakeholders and helps in maximising the
profit.

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5.0 CONCLUSION

This assignment deals with acquisition of an unlisted company by a listed company named
AB plc. Acquisition of a new company required funding to its existing shareholders. Funding
can be done by issuing equity shares, preference shares, debentures, or by offering the
company to the public or maybe by loans from banks or financial institutions. Each of these
funding methods have its own pros and cons and after critically evaluating each of these a
financing and investment decision need to be made. A good financing and investment
decision helps in increasing the value of shareholders and bringing profit to the company.

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6.0 BIBILIOGRAPHY

Boundless, 2005. Boundless. [Online]

Available at: https://www.boundless.com/finance/textbooks/boundless-finance-
textbook/introduction-to-the-field-and-goals-of-financial-management-1/introducing-finance-
22/types-of-financial-decisions-investment-and-financing-145-3871/

Convertbondguide, 2009. intro to convertible debentures, s.l.: s.n.

C. S. C., 2003. Redemption of preference shares. In: Fundementals of accounting. s.l.:s.n.

Efinance management, 2009. efinance management. [Online]

Available at: https://efinancemanagement.com/sources-of-finance/benefits-and-disadvantages-of-
debentures

Financial Dictionary, 2013. The free dictionary by Farlex. [Online]

Available at: http://financial-dictionary.thefreedictionary.com/bank+loan

Fund Era, 2013. Fund Era INC. [Online]

Available at: https://www.fundera.com/resources/business-acquisition-loans#term loan

Investopedia, 2007. investopedia. [Online]

Available at: http://www.investopedia.com/terms/d/debenture.asp
[Accessed june 16 2017].

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