Alejandro Chiriboga : Business

C 3.1 Sources of finance-C 3.1-1: Case Study

Questions: 1. Explain the meaning of the terms: Unincorporated business: Commerce a privately owned business, often owned by one person who has unlimited liability as the business is not legally registered as a company. Going public: Implies selling shares to new investors, the shares previously belonged to the private/original owners. 2. Discuss the additional sources of finance that would be available to Sherston Antiques if they went public. The main reason/benefit for the company to go public is that they can definitely earn more money. They start to sell shares and so earn more money. However it also depends on if the company has a good reputation, but in most of the cases when a company goes public its because they need it and there are definitely people interested in investing. 3. Explain why the firm should aim for a balanced portfolio of finance sources rather than just one. First of all, it is the best choice because the business is unincorporated and so a balanced portfolio is very secure in this case. It is a defense strategy. However it runs the risk to loose a huge quantity of money. 4. Discuss the advantages and disadvantages of using a venture capitalist to finance such an expansion. Advantages: Possibility for above-average returns. Disadvantages: To start using a venture capitalist to finance the expansion, there must be a huge invest from the owners besides the fact that venture capitalist get a part of the investment and power over decisions.

Alejandro Chiriboga : Business

Short Answer Questions:

Q1: Sale and Leaseback is when a company has to sell their assets since they basically have no other option since they arent profit sufficient. The companies can all ways get them back for a lower price. Q2: The firm becomes completely dependent on more things since it has rising its capital. Also it is far more secure and if one of the sources were to stop connection, the firm has other sources to rely on. Q3: Debenture holders and shareholders are different in many ways. For example shareholders cant become debenture holders, and they cant get anything back if there isnt profit. However, Debenture holders cant vote any of the decisions of the firm while shareholders can. Q4: Venture finance has the risk of losing all money invested without the possibility of receiving a profit afterwards. Q5: 1. I 2. E 3. E 4. U 5. I 6. I 7. U 8. E 9. E 10. I 11. U

Alejandro Chiriboga : Business

Homework: Tesco: Sale and Leaseback activity

Q1: Define the terms 'sale and leaseback' and 'joint venture'. Sale and leaseback: A financial transaction where one sells an asset and leases it back for long term so you still can use the asset but you do not own it. Joint venture: a commercial enterprise undertaken jointly by two or more parties that otherwise retain their distinct identities.

Q 2: Explain why Tesco has chosen to enter a joint venture to sell and leaseback a number of their stores. The firm has done this because they want to expand and so by doing this they still can use their assets, which can be useful for the expansion, and they have gathered a huge amount of money by choosing a joint venture. Q 3: Examine three other sources of finance that Tesco could have used instead of sale and leaseback to fund their international expansion plans. Banks: They can offer overdrafts, which is a short-term finance for the firm. Equity Finance: They can exchange a part of the ownership to get the firm on going in the expansion. Creditors: Short term credit until good have been sold.

Q 4: Discuss the advantages and disadvantages of using sale and leaseback to fund further international expansion for Tesco. Advantages: Removes a capital asset from the balance sheet at book value and replaces it with cash realized from the sale. Improves cash position and is freeing up cash for other investments. Tesco retains control and utility of the property. Disadvantages: Tax impact may be substantial if the property has been owned for a lengthy period and the book value is low compared to the selling value.