Sources of Capital: Owner's Equity

This step involves short and long term debt equity analysis. The proportion of equity capital depends on the possessing and additional funds will be raised. The choice of the source of funds the company has are the issue of shares and debentures, loans to be taken from banks and financial institutions and public deposits to be drawn in form of bonds. The choice will depend on relative merits and demerits of each source and period of financing. The management of the investment funds is key in allocating that the funds are going in the correct place. The profits that are made can be down in two ways dividend declaration which includes identifying the rate of dividends and retained profits in which the volume has to be decided which will depend upon expansion and diversification of the company. The management of cash is another important function. Cash is needed for all different aspects of the company such as payment of salaries, overhead and bills. All of these are important in a company and how successful the financial aspect is going to be.The financial management practices include capital structure decision, investment appraisal techniques, dividend policy, working capital management and financial performance assessment. A company needs to have well financial in order to be successful. “A company that sells well but has poor financial management can fail.” (Johnston)

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (Eds.). (2011). Essentials of corporate finance (7th ed., Rev.). New York, NY: McGraw-Hill Irwin.

We use Capital Asset Pricing Model (CAPM) approach to calculate the cost of equity. The formula of CAPM is re = rf + β × (E[RMkt] – rf).

The company position is strong enough so its better that company should use debt financing instead of equity financing.

While the relative debt and equity values can be easily determined, calculating the costs of debt and equity can be problematic. In calculating each component, we are given many different options and proxy values (boundless.com, 2015).  In addition the calculation is based on assumptions of the capital mix that cannot always be maintained, “One of main limitation of using WACC is that it does not take into consideration the floatation cost of raising the marginal capital for new projects. Another problem with WACC is that it is based on an impractical assumption of same capital mix which is very difficult to maintain” (Borad, 2012).

2. What do the results say about how firms in this industry can deliver strong financial returns in different ways?

Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

Stakeholders include but are not limited to employees, investors, and lenders. Therefore, to have a well-informed and well-rounded opinion, it helps to have accurate and up to date financial statements and ratio distribution of the company’s revenue. With the statements, it not only shows the current position of the company but gives insight to determine the best decisions in the running of the company. In regards to lenders, financial statements are the antithesis of the lending criteria used to calculate any monies the company may or may not receive. This calculation is important in estimating the average amount of money that they can lend the organization, and the amount can be paid after a certain period taking into account the rate of interests (Cummings & Worley, 2009).

Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

For our pro forma, we first began with the income statement. To determine Sales, we assumed an increase at a consistent rate each year. COGS and operating expenses were estimated as a percentage of Sales. Exceptional Costs and Restructuring Costs were not considered since pro forma statements exclude unusual and nonrecurring transactions. With these figures, we were able to determine our Profit Before Tax (PBT). For our tax expense, we assumed a constant tax rate. By subtracting the Tax Expense from our PBT we determined the Profit/(loss) After Tax. Lastly, we subtracted dividends, which remained unchanged each year, from the Profit/(loss) After Tax to find the company’s Retained Earnings. Below is a diagram illustrating these steps:

The course project involved developing a great depth of knowledge in analyzing capital structure, theories behind it, and its risks and issues. Before I began this assignment, I knew nothing but a few things about capital structure from previous unit weeks; however, it was not until this course’s final project that came along with opening

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.

Capital structure is defined as the mix of the long-term sources of funds that a firm use. It is composed of equity, debt securities and affect long-term financing of the entity. It is made up by shareholder’s funds, long-term debt and preference share capital. The capital structure mostly focus on the proportions of debt and equity displayed in the company financial statements, especially in the balance sheet (Myers, 2001). The value of a firm can be calculated by the sum of the value of its firm’s debt and equity.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).

The purpose of this assignment is to study the finance sources available to a company. Here according to the assignment requirement, we have to select a British public company to study the available sources of finance from where the firm collects its capital requirement. Following the guidelines we have to analyze various sources with their potentiality and then we make viable analysis of Cash and sales budget. Here some salient financial ratios are employed for the purpose of analyzing the financial statement of the company.