EDEXCEL finance assignment
Task 1
Identify the different sources of finance available to Mr Norman for buying the new online learning system to expand his service business.
There are many different sources of finance available to Mr Norman for investment in order to expand his business. These include:
Using personal savings to invest in the business growth
Raising equity through issue of new shares.
Short term bank loan
Long term bank loan
Bank overdraft
Using retained earnings from the profits earned in the past
Issuing loan notes
Leaseback options
Analyse the cost of different sources of finance and explain what the likely implications are of the various sources of finances that you identified in preparing the task above.
Using personal saving to invest in the business growth means that Mr Norman will be using his own money to buy the new online learning system. There is no real cost of this source of finance. However, there is an opportunity cost of this investment that is the interest that the money will earn if it is left in the bank (or any other income that it could generate if it is not invested in the business). However, it is to be noted that Mr Norman wants to keep his expenses to the minimum therefore this may not be an appropriate source of finance in this scenario.
Raising equity through issue of new shares mean that Mr Norman will be issuing new shares for his company to people other than himself. Equity is a high risk investment and consequently the cost of equity is also very high as compared to the debt finance. The new shareholder will not only take away a share of the profits but issuing new shares will also dilute the control of the business.
Short term bank loans are a very good source of finance. The cost is relatively lower than the equity finance and unlike the equity finance the principal amount is redeemable after some time and is not perpetual. Mr Norman may be able to get a short term bank loan in order to finance the purchase of the new online
Identify the different sources of finance available to Mr Norman for buying the new online learning system to expand his service business.
There are many different sources of finance available to Mr Norman for investment in order to expand his business. These include:
Using personal savings to invest in the business growth
Raising equity through issue of new shares.
Short term bank loan
Long term bank loan
Bank overdraft
Using retained earnings from the profits earned in the past
Issuing loan notes
Leaseback options
Analyse the cost of different sources of finance and explain what the likely implications are of the various sources of finances that you identified in preparing the task above.
Using personal saving to invest in the business growth means that Mr Norman will be using his own money to buy the new online learning system. There is no real cost of this source of finance. However, there is an opportunity cost of this investment that is the interest that the money will earn if it is left in the bank (or any other income that it could generate if it is not invested in the business). However, it is to be noted that Mr Norman wants to keep his expenses to the minimum therefore this may not be an appropriate source of finance in this scenario.
Raising equity through issue of new shares mean that Mr Norman will be issuing new shares for his company to people other than himself. Equity is a high risk investment and consequently the cost of equity is also very high as compared to the debt finance. The new shareholder will not only take away a share of the profits but issuing new shares will also dilute the control of the business.
Short term bank loans are a very good source of finance. The cost is relatively lower than the equity finance and unlike the equity finance the principal amount is redeemable after some time and is not perpetual. Mr Norman may be able to get a short term bank loan in order to finance the purchase of the new online
Bibliography: Antle, R. & Garstka, S. J., 2004. Financial Accounting. 2nd ed. s.l.:Thomson South-Western. Baker, H. K. & Powell, G., 2009. Understanding Financial Management: A Practical Guide. s.l.:John Wiley & Sons. Brigham, E. F. & Ehrhardt, M. C., 2011. Financial Management: Theory and Practice. 13th ed. s.l.:Cengage Learning. Greenwood, R. P., 2002. Handbook of Financial Planning and Control. 3rd ed. s.l.:Gower Publishing, Ltd.. Mcgraw-hill, 2009. The Four Basic Financial Statements: An Overview. [Online] Available at: http://highered.mcgraw-hill.com/sites/0073324833/student_view0/ebook/chapter1/chbody1/the_four_basic_financial_statements__an_overview.html [Accessed 5 October 2013].