External Sources of Finance
The finance describes the management creation and the study of the investments, credits banking, various assets and liabilities. Finance can be categorized into two parts corporate finance and personal finance. The discussion deals with the corporate finance and their source. Finance is the lifeblood of the business (McQuinn and Roche 2016). All the business enterprises need finance to invest in the assets and carry on with the day-to-day business operations. The assets include the fixed assets like the land building, machineries and others. Once the business is in operation, the funds are needed for the working capital like the direct and indirect expenses like various purchases, wages payments bills and so on. A business that follows the going concern convention requires extra capital to cover a temporary crisis in the cash flow and to innovate and improvise the business. The main type of finance includes the finance that are short-term, long-term and medium term (Yellen 2016). While evaluating the companies the most important factor is to look at tr balance of the sources of the funding. For instance, if there is too much of debt the company may fall in trouble. Similarly, on the other hand the venture might be losing the growth prospects if the enough finance is not borrowed.
The chosen organization is Marks and Spencer is a company that is also known as M&S. it was founded in founded in the year1884 by Michael Marks and Thomas Spencer in Leeds as a major British retailer that is multinational with its headquarter in the Westminster City in London. It is listed on the Stock exchange of London and is a constituent of the FTSE 100 Index. In 1998, the concern became the first retailer from Britain to make a profit before tax of £1 billion approximately. The company specializes clothes, home products and high-class food products. At present, the M&S has about 979 stores across the U.K with more than 84,939 employees working under them. The range of products of the company includes clothing for men, woman and children, as well as home products and food.
The second organization is Morrison Supermarkets started in 1899 by William Morrison, therefore, has the abbreviation of Wm, It is the United States fourth largest chain of supermarkets with its headquarter in Bradford, England. The enterprise is listed on the Stock Exchange London and is part of the FTSE 100 Index of companies. Currently Morrison owns around 10% of the company with more than 132,000 employees working under it. Initially the Company began as a retail shop selling butter and eggs in Rawson Market, Bradford, England. Until 2004, Morrisons store locations were primarily focused in the northern England, but with the takeover of Safeway in that year, the company’s presence increased significantly in the southwards, Scotland and Wales. As of 2016, the company had 498 superstores across England, Wales and Scotland. Another store was also constructed in Gibraltar, which is the only store outside Britain. It deals with various food and drinks, Clothing, Magazines, and Books.
Short-term and Medium-term External Sources of Finance of Marks and Spencer and Morrison
Sources of finance that are External refer to those sources that come from outside source of the business. For instance, internal source of finance like the retained earnings are internal whereas bank loan is an external source. Further, the external fund sources can be categorised into short-term and long-term sources of finance. The term external source of finance itself suggests the very nature of capital. They are the equity capital, preference share capital, debentures, loans that are long-term, leasing, trade credit hire purchase and many more (André et al. 2015). By external sources, it is meant the arranged capital from outside the business, unlike retained earnings which are internally generated with the help of business operations.
1.The external source of finance
The external source of finance of the marks and Spenser’s company and Morrison includes two types one is the short and medium type finance and the other is the long-term finance.
The medium term and the short external source of capital of the companies are as follows:
Trade credit: Trade credits is the finance that is obtained from the suppliers if the commodities over the period between delivery of goods and subsequent settlement of account by the recipient. It is also regarded as the finance that is spontaneous as the company can enjoy the goods without having any pay up. According to the annual report 2017 of the M&S, the total trade creditors are $997.5 million and as for Morrison it is $2837 million (Li et al. 2016).
Bank credit: Bank credit refers to the lending provided to the banks to the companies is predominantly short term, it can also be termed as medium termed source of finance as it is a valuable external source. The total borrowing from banks in case of Morrison it is $1550 million and in case of M&S there is no bank credit in 2017.
Overdrafts: The bank overdraft refer to the amount that the companies may withdraw either in the form of cheque or cash. There is a rate of interest that is charged on the bank overdraft that depends on the rate at which the amounts are withdrawn (Zeitun and Tian 2014). The total bank over drafts in case of M&S is in 7017 is $70.3 million and for Morrision is $3million.
Short-term loans: The short-term loans are the loans that are provided for more than a year. There is a fixed rate of interest that is charged. In usual terms, the rate of interest is high. According to the annual report for both the companies of 2017, there are no short-term loans of loans and borrowings at present.
Long-term External Sources of Finance of Marks and Spencer and Morrison
Bills of exchange: The trader who has purchased the goods from the suppliers draws a bill by guarantying to pay the amount in a future date (Tripathi 2016). However, the supplier may keep or sell the bill in the market. The both of the companies a large public limited companies does not deal with Bills of exchange.
Hire purchase: The hire purchase refers to the hiring or the acquiring of the goods and services ownership or the assets in installment payments. The inland revenues will generally permit the customers to claim and retain the capital allowances provided that the option to purchase fee is less than market value of the end of the contract term (Burgaud et al. 2017). At present, there is no Hire purchase made by the companies being established and successful one.
Leasing: leasing refers to the transaction that is a commercial arrangement whereby an asset owner conveys the right to use the Asset in return of payment over pre-agreed period of time. The net lease obligation of the Morrison Company is $179 million and in case of Marks and Spencer’s it is $203 million (Swenson, Gravitz and Lightner 2017).
The long-term sources of finance of the companies are as follows:
Equity shares: The equity share capital represents the investment made by the owners of the business. They owners are the shareholders who have the voting rights. The shareholders enjoy the profits and bear the risks of ownership. The dividends are paid to them only after paying the preference shareholder dividends and meeting the future needs of investment of the company. The net equity share capital of M&S is $6697.1 million and for Morrison it is $4063 million (Guinnane and Schneebacher 2018).
Preference shares: In case of Preference shares, the shareholders are entitled to get a fix percentage of dividends before profits are distributed to ordinary shareholders(Laux, Lóránth and Morrison 2017). They are not having any voting rights and do not qualify for tax relief. Both the companies do not issue preference shares (Hugonnier and Morellec 2017).
Debentures: Debentures are loans that are secured on company assets with floating or fixed interest rate. It is a multiple loan to the company in the sense that several people contribute it oppose to just one individual (Wild et al. 2016). Debenture holders are creditors of the company but not members of the company. There is no debenture issue in case of both the companies, being a public limited one.
Considerations when Choosing the Type of Finance
Mortgages: Then is the mortgage, mortgage is a social security on facing the title is a property whichever the lender at as a security for a cash loan interest is payable on the amount borrowed. The amount of mortgage is not mentioned in the annual report of the year 2017.
Warrants: Warrants are rights that a given to the investors allowing them to buy new shares in a company at a future date at a fixed given price they are generally issued alongside unsecured debt as a bribe to potential investors. There is no warrants issued in Marks and Spencer’s and Morrison at present (Allen, Carletti and Marquez 2015).
2.Considerations while choosing the type of finance:
There are many number of ways in which a financing can be done in a business. There are a range of and investors to choose from when a business owner is making decisions related to financing. It can be done through investment or debt. The terms of Financing can vary between the two factors that are to be considered while choosing a business method of Financing (Sundaresan, Wang and Yang 2015). It includes Repayment terms and the total cost of capital requirement of the investor or lender.
Considerations by Marks and Spenser’s:
The M&S being an established company and not being a start up, considers the following factors for financing:
Repayment Terms: It is the consideration of the tenure of the financing arrangement. Long term loans and can build up a considerable amount of interest over time. But loans with the short term nature can require larger periodic payments. Considering the amount of the periodic payments and how often they are required to pay is very important (Bhardwaj 2018).
Fees Structure and Interest: It is the process of adding up all the cost which is associated with each of the financing method before making a decision (Elsas, Flannery and Garfinkel 2014). Common costs for loans include interest rates, origination fees and fees if the brokers. Financing through investments also includes much different cost.
Financing Requirements: Financing requirements may differ from year to year. In some financial year, the M&S may require more funds and at times, there is a need of fewer funds. It depends upon the investment decisions. The tenure of the loan is also determined in this stage.
Assets of the company: Assets play a major part in obtaining finance. It is the collateral and is safety backup for the lenders. If for some reason the company cannot pay the loan back, the Lender may liquidate the company assets
Considerations by Marks and Spencer’s
Considerations by Morrison:
Financing can be done by either taking a loan or making an investment in the exchange for ownership stake in the business. Choosing an appropriate source of finance for business is difficult and time consuming. Financing can come from debt or investment and the financing terms may vary significantly (Bonaimé, Öztekin and Warr 2014). The Criterion and implication of each source require a critical analysis before proceeding and it is essential to measure the cost and the benefits of each of the source before making a decision. Factors that are considered while choosing a source of finance in Morrison is as follows:
Risk: Risk is an important element considered. It is the consideration as to what will happen if the company is unable to meet the financial commitment relating to the particular source of finance. If Morrison has borrowed from a source and is not being able to pay back to them, then in return, compensation for that is to be paid (Thies and Klock 2018).
Cost of Finance: The cost of finance and its effects on income plays a basic role in the financing decisions. The overall objective of Morrison is to lessen the cost of finance and maximize the wealth hence it is vital to take in hand the implications of choosing one funding source over another.
Control: The control is another factor at plays a significant role while choosing a source of finance. Issuing extra equity shares will result in the dilution of control among existing owners or shareholders. Investors are required to put integer into the operation on the board of directors and receiving performance and operation report (Awan and Amin 2014).
Long term and Short-term borrowing: It is the consideration as to the time period of the loan. It may be short term or long-term. It is chosen according to the specific needs of the company in a particular financial year.
Income: Income is the profit after subtracting the expenses and both lenders and investors consider it (Bancel and Mittoo 2014). If a Morrison does not generate much income then the lenders will conclude that the business will have a tough time in repaying the loan back the loan.
Conclusions and Recommendations
It is essentially important in the recent age to promote and upgrade business in such a way that operation can take place efficiently. The capital structure of an enterprise refers to the technique in which a company finances its general growth and operations with the help of different sources of funds. Debt comes in the form of long-term notes payable and bond issues, while equity is classified as retained earnings, preferred stock, common stock or retained earnings. Short-term debt are also issues to meet the capital requirements such as the working capital and is considered as a part of the capital structure. When evaluating the capital structure of a company, the balance sheet is to be considered and analysis of working capital, asset performance and capital structure. Financing a business through borrowing is cheaper than using equity. In case of marks and Spencer’s it is one of the leading retailers of UK, operating in more than 42 territories all over the world. The company focuses on the various food and clothing products and their strategies is to achieve growth that is more international. The enterprise has a debt of $2526.4 million and equity of $6697.1 million and a debt to capital ratio of 0.28. This means the company finances more by equity than by debt. Therefore, it can be said the company uses the process of equity financing for making investment. Then comes the company of Morison. Presently, it is termed as the chain of supermarkets in the United Kingdom that is fourth largest. With almost 124,000 employees working in 403 stores across the nation, Morrison’s has an operating debt of £671 million in 2017 and equity of $4063. Therefore, it is also uses equity financing as source of finance.
Considerations by Morrison Supermarkets
References
Allen, F., Carletti, E. and Marquez, R., 2015. Deposits and bank capital structure. Journal of Financial Economics, 118(3), pp.601-619.
André, M., Bozio, A., Guillot, M. and Paul?Delvaux, L., 2015. French public finances through the financial crisis: it’s a long way to recovery. Fiscal Studies, 36(4), pp.431-452.
Awan, A.G. and Amin, M.S., 2014. Determinants of capital structure. European Journal of Accounting Auditing and Finance Research, 2(9), pp.22-41.
Bancel, F. and Mittoo, U.R., 2014. Cross-country determinants of capital structure choice: a survey of European firms. Financial Management, pp.103-132.
Bhardwaj, A., 2018. Financial Leverage and Firm’s Value: A study of capital Structure of Selected Manufacturing Sector Firms in India.
Bonaimé, A.A., Öztekin, Ö. and Warr, R.S., 2014. Capital structure, equity mispricing, and stock repurchases. Journal of Corporate Finance, 26, pp.182-200.
Burgaud, F., Pokhrel, M. and Mavris, D.N., 2017. A business-driven optimization methodology applied to commercial aviation programs. In 55th AIAA Aerospace Sciences Meeting(p. 0010).
Elsas, R., Flannery, M.J. and Garfinkel, J.A., 2014. Financing major investments: information about capital structure decisions. Review of Finance, 18(4), pp.1341-1386.
Guinnane, T.W. and Schneebacher, J., 2018. Capital Structure and the Choice of Enterprise Form: Theory and History.
Hugonnier, J. and Morellec, E., 2017. Bank capital, liquid reserves, and insolvency risk. Journal of Financial Economics, 125(2), pp.266-285.
Laux, C., Lóránth, G. and Morrison, A.D., 2017. The adverse effect of information on governance and leverage. Management Science.
Li, X.D., Feng, X.N., Lu, B. and Song, X.Y., 2016. THE DETERMINANTS OF CAPITAL STRUCTURE CHOICE FOR CHINESE LISTED COMPANIES BASED ON STRUCTURAL EQUATION MODELING APPROACH. International Journal of Mathematics, Game Theory, and Algebra, 25(1), p.51.
McQuinn, K. and Roche, M.J., 2016. Efficient frontiers and fiscal stability: An ex-ante and ex-post application to the Irish public finances (No. 538). ESRI Working Paper.
Sundaresan, S., Wang, N. and Yang, J., 2015. Dynamic investment, capital structure, and debt overhang. The Review of Corporate Finance Studies, 4(1), pp.1-42.
Swenson, S., Gravitz, R.M. and Lightner, G.M., 2017. Modeling and Simulation for the Enterprise: Integrating Application Domains for the M&S Professional. The Profession of Modeling and Simulation: Discipline, Ethics, Education, Vocation, Societies, and Economics, 253.
Thies, C.F. and Klock, M.S., 2017. Determinants of capital structure. Review of Financial Economics, 1(2), p.40.
Tripathi, V., 2016. Corporate Financing Pattern and Capital Structure Analysis of Leading Automobile Companies in India: A Panel Data Regression. Journal of Commerce and Accounting Research, 5(4).
Wild, E., Wansbury, N., Crudgington, J. and Andrews, M., 2016, May. The Consequences of New Sources of Capital for the Oil and Gas Sector. In SPE/IAEE Hydrocarbon Economics and Evaluation Symposium. Society of Petroleum Engineers.
Yellen, J.L., 2016. Perspectives on inequality and opportunity from the Survey of Consumer Finances. RSF.
Zeitun, R. and Tian, G., 2014. Capital structure and corporate performance: evidence from Jordan.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
