Finance - Source of Financing - Overview

Question 1

What is needed for capital

Answer 1

• Source of financing can include equity, short-term or long-term debt, and more complex instrument
• Equity financing is received on the issue of shares of the company
  Common items for capital
• Ongoing operation
• Capital expenditure - building and maintaining plant and equipment
• Merger and acquisition
• Investment in working capital
• Refinancing existing debt and equity

Question 2

Provide the diagram for financing that is internal and external

Answer 2

External source of finance
1. Debt : Supplier trade, Factoring, Customer advances, Line of credit, asset-based lending, securitization, term loan, mortgage, leasing
2. Complex instrument: Bond with warrants, convertibles bonds, convertible preferred shares
3. External equity: Common shares, Preferred shares - Angel investors, Venture capital, private equity, Public investor

Internal source of financing -
1. Reinvestment of net earnings

Question 3

Explain what the financing life cycle is and the stages

Answer 3

5 stages
1. Development stage - Characterized as start-up. The idea is to get the business started. High rate of failure “Seed capital, Family and friends”
2. Commercialization stage - Moved beyond the proof of concept and ready to launch its product to service to market. With little or no revenue, cost is high. “Venture capital”
3. Growth stage - Proven business model, revenue growing rapidly and profitability has been or will be achieved. May be unable to generate sufficient operating cash flow
“Equity, debt”
4. Maturity stage - The company begins to experience less organic growth, but it is not generating strong operating cash flow, Debt costs are lower than equity cost
“Debt, equity”
5. Decline stage - characterized by falling revenue and diminishing competitive advantages
“Debt”

Question 4

Provide 6 features that are to be analysis for financing alternatives

Answer 4

1. Amount
2. Cost before and after taxes
3. Term (Maturity)
4. Obligatory payment
5. Condition
6. Financial reporting impact

Question 5

What are the stakeholder objective

Answer 5

Stakeholder objective: Entity financing strategy, corporate strategy mandate a growth plan, then financing must be ready and available

Challenges - Existing owner’s preference - Existing owners will have financing preferences that depend on their level of risk tolerance
Conflict - Capital must serve both the entity objective and the interest of existing owners

Question 6

What is needed to conclude and advise

Answer 6

Need to ask questions:
1. Does the entity have access to this source of financing and will it generate sufficient funds to meet capital need
2. What is the cost of this source?
3. Are cash flow expected to be adequate to meet obligatory payment

Financial flexibility - relates to the entity’s ability to react to unexpected events and is often used in relation to how much debt, sales declining along with operating cash flow