Running Head: BUSINESS FINANCING 1

Business Financing

Students Name

Institutions Name
BUSINESS FINANCING 2

Business Financing

Part A: Report On The Financing Options

A Report Of Printers Limited On How To Raise The 2.6 Million Pounds For The Projects

Introduction

This is a report on the options that the partners of Printers Ltd can use to raise the 2.5

million that they require to undertake important projects so that they can still be profitable. Three

family members own the company under consideration, and its specialization is drawings and

paintings. Because of the increase in the profits and the thriving of the firm, they have an

opportunity to expand their company. Due to the increase of turnover and capital received the

company wants to diversify its activities by including printing of art book. Successful

establishment of this new part requires about 2.5 million to finance it. They don't have any

retained earnings hence they will have to raise additional capital. Because of this, they are

looking for alternatives that would enable them to raise the additional funds. The options that

they can use are as discussed below.

Alternatives to Raising the Required 2.5 Million Pounds

1. Debt

This type of financing implies borrowing money from a source external to the firm with the

agreement of paying back the borrowed amount plus interest which is usually agreed upon by the

parties of the transaction. One form of financing include the loans borrowed from a bank (Sutton

& Detweiler, 2015:86). In this case, the amount is paid back monthly. Besides, these type of debt

requires that the borrower gives a collateral to act as a guarantee so that in case the company
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defaults paying the loan, the bank to use the insurance to get back its money. Items that can be

used as guarantees include insurance policies, real estates, company machinery and receivable

accounts. The second of debt financing that they can use is the sale of bills and bonds. Getting

financing through debt is in many cases difficult (Mullins, 2014:45). Considering the state in

which Printers Ltd is, obtaining money through the means of bond or bills will not be easy. This

is likely to be caused by factors such as low credit rating considering the loan that they still have

two years to pay. Besides, the use of bonds will not raise the entire 2.5 million required for the

purchasing and running of the art book printer. Hence, it cannot be considered as an option.

Considering borrowing loan from a bank, the loan that should be borrowed will be repayable

over a five-year period. The interest that they will be required to pay can be fixed or floating.

However, as discussed above, a loan from a bank requires an asset the bank can use a collateral

should Printers Ltd fail to repay the loan on time. However, from the brief given in the question,

it has not been indicated that the company has some form of asset the bank can use. The property

preferred are real estates such as buildings and land. Besides, the company is still paying a loan

that it borrowed three years ago. If they could get the loan, the money would be enough to

finance the cost of the art book printing machine fully. Therefore, the only available option

would be the personal guarantee from the either of the directors.

2. Equity

Equity financing implies that the company is raising money through the sale of its shares to

the public. Contrary to debt financing the money that is raised through equity financing is not

repaid monthly (Mullins, 2014:52). The buyers of the shares invest their money in the company
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and become owners of the company in the ratio of their investment to the total value. Hence,

they are given parts of the profits over time.

The forms of financing, in this case, include the use of issuing of rights (Longenecker et l.,

2017:322). This type of equity option is a non-diluting of ownership and usually the cheapest

investment option available. However, the shareholders are not in a position to invest the money

that they have into the company. Besides, all the partners would have to agree on changing the

form of ownership of the Printers Ltd. Due to these factors, rights issue can be used in this case.

Secondly, the three brothers can list the business by offering initial public offer. This would

dilute the company ownership. However, it will cause disinvestment. The disadvantage of this

equity financing option is that it is very expensive. Lastly, the brothers can use private equity.

However, it would make them lose the control of the business. The option results in high returns

and functions best as an exit strategy financing method. It is the best choice available. The

disadvantages of this option are that it requires the introduction of the new investor into the

business. Besides, sourcing this option is not easy.

3. Generating Internally

Internal generation is the money that is raised by a company within it so that it increase its

diversification of products. It typically comes from the directors' accounts or the profits that the

business had made. The internal sources of financing may include retained profits, delay of

paying trade variables, increasing the tightness of credit control and the reduction of the books of

inventory.

For the case of Printers Ltd, the nonexecutive director can retain the profits which he is given

and then later finance the company with it. However, the amount that the business would be able
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to raise through this method would far below that required by the enterprise. Besides, there is the

issue of the willingness of the non-executive to invest money from his account into the business.

Secondly, debt factoring can also be used by the directors to get money to finance their

operation (Bekaert & Hodrick, 2014:149). However, it is expensive, and the risks associated with

it are very high. Lastly, Printers Ltd can use the private fund's generation method of efficiencies

of working capital. In this case, the directors of the company can increase the resources by

reducing the inventory levels, increasing their times of payment, decreasing the collection

periods and reducing the working capital of the enterprise. This method if well managed is very

efficient. However, it cannot generate amount close to that required.

Delaying the tribute payable occurs when a firm takes an extended period before it can settle

its credit. However, this method is not advisable since it destroys the reputation of the business.

Hence, it might find difficulty in future when it will want to purchase materials on credit.

Printers cannot use this method. Reduction of inventories implies that the company will reduce

the amount of stock which it stores so that it can use the extra money on financing the expansion

of the enterprise. Since Printers Ltd does not have stock which it stores, they cannot use this

method.

4. Assistance From The Government

In this case, the business will depend on the government to finance them. This comes in the

form of grants and incentives (Lasserre, 2012:394). The grants can be of several types. The

government does not fund all the sectors (Byrd, 2017:107). In this case, the Government funds

sectors of the economy that they think are under threat from cheap imported goods. No given

reason will make the government finance the three brothers. Hence, the possibility of this
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technique working for them is very low. Essentially, the government provides the financing

using grants; whenever necessary, the government will provide direct investments to help its

ailing sectors.

Conclusion

After examining their available options, the directors will realize that they are between a

rock and a hard place. They will have to compromise and come to terms on how they will

achieve the business expansion. Should they fail to agree on a particular option, they would be

acting as a hindrance to the expansion and the diversification of the business. On the analysis

done above on the options that the managers can use to get money, it is determined that the best

solution is that where the executive directors contribute money to the organization by injecting

the required 2.5 million. The only problem that might arise is whether the directors can raise the

2.5 million from their accounts. As discussed in the analysis above this is the type of internal

funding to raise the finance for business expansion. The importance of this method is that it

maintains the business ownership with the executives. It is the best option for this scenario. The

visibility of this option should be analyzed to determine whether it can give the desired results.

One way of conducting the visibility is through the determination whether the non-executive

members would accept the idea or not. It can also include finding out whether the executive

directors can raise the money required.

Should that fail, the directors should consider looking for an investor who will inject

capital into the business. However, this will cause the control of the firm to be diluted. Hence, a

proper exit strategy would have to be developed.

Part B: Memo To The Financial Director

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Introduction

Printers Ltd has won an attractive contract with a publishing house in German. The

contract involves the printing of several art galleries. The fast payment will be made six months

from now, and it will be 2 million Euros. Their hedging options are to be determined based on

their ability. This is memo to the Financial Director explaining some of the hedging techniques.

Comparison Between A Forward Exchange Contract And A Money Market Hedge

The comparison between foreign exchange contract and the money market hedging

techniques are as compared below:

Money market hedging:

Average Rate = 1.2605 + 1.2631= 1.2618. Invest Euro after 6 months. Amount

payable was 1.263 million. This becomes:

FRA rate: 1.2631. Invest 2 million and then borrow 2/1.2631 = 1,583,340 Euros

Forward Rate Agreement

Average Rate = 1.2605 + 1.2631= 1.2618. Invest Euro after 6 months. Amount payable

was 1.263 million. This becomes:

FRA rate: 1.2618. Gives 2/1.2618 = 1,585,037 Euros

Foreign exchange and money marketing strategy: 2 million

Foreign exchange for money market hedge: 2

Comment On The Results Above:

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The FRA is the best method for this type of hedging in this case.

Money Market Hedge

This is a method that is used in hedging foreign currency through the use of the money

market or in the financial market where instruments of high liquidity are accepted. Hedging of

money through this techique is one of the most inconvenient ways that can be used by large

businesses (Kensinger, 2012:49). However, the technique works very well for small businesses

that wish to hedge foreign currency. The cost for hedging small amounts of money is not as high

for retail businesses as compared to large businesses (Larkin & DiTommaso, 2015). Unlike the

forward contract or the future market techniques, money market hedge can protect against

fluctuations in foreign currency. In simple terms, money market hedge is the borrowing and

lending of money in international currencies. It thus reduces the currency risk by holding the

value of the currency of another country, in the currency of one's country. Thus, he would be

protected from losing money in international trade as a result of currency fluctuations (Javier,

2017:20).

In this, they can borrow a loan of 2 million. The amount borrowed should be equivalent to

the 2 million in a period of six months. They would then convert them into Euros and invest the

money. Consequently, the directors would use the deposit of the Euros so that they pay the 2

million Euros that they have in GBP. In this scenario, the entire cost has been fixed, and the

chances of undergoing a loss are very little. The same rate that applies to future rate agreement

applies in this one too. As discussed above, this method has its disadvantages such as the high

cost of the transaction. Besides, it results to tax withholding which is unethical issue.

Forward Rate Agreement

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This hedging technique is also referred to as a hedging contract. It refers to a foreign

exchange rate technique where the two parties to a transaction agree to settle either the loss or

profit at any time before the day of the contract (Goss, 2014:25). The loss or profit depends on

the difference between the price of settlement that has been agreed upon by the two parties and

the spot price of the commodity at the day of the next transaction. The differential of the

payments is the only money that is exchanged on the day of the contract. The FRA matures on

specific days only.

Furthermore, the forward rate agreement protects the two parties involved in the transaction

from the changes in the rate of interest. It is entered by investors who wish to hedge on the profit

to be achieved from contracts in the future. There are two main reasons for entering into such

contracts (Corelli, 2015:164). The seller may consider entering into a forward rate agreement so

that he may be protected from a reduction in the interests rates. On the hand, the buyer enters the

to shield himself from the increase in the rates of interests.

In the case, of the Printers Ltd and the Germany publishing house, the sellers are equivalent

to Printers Ltd while the buyers are equivalent to the German publishing house. Therefore, both

of them into the forward rate agreement to protect themselves against the change in interest rates.

As a result, they will be protected from interest rates such that none of them may benefit or lose

despite the changes that may take place on the interest rate.

Alternatives for Hedging

1. Taking The Rest And Convert At Spot In A Period Of Six Months

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According to Shapiro & Moles (2014: 197:296), the directors can use this technique to buy

the currency at a time in future at any rate agreed. These will require that Printers Ltd take risks

and agrees to make the payment after six months as proposed by the German publishing house.

In this case, the transaction takes place at the agreed time and is done at the exchange rate that

was mentioned in the contract. Printers Ltd, regardless of the prevailing rate in the market would

not get any loss. This is beneficial since the effects of fluctuation in the exchange rate are

avoided (Stimpson & Smith, 2015:298). Secondly, it will increase the control that the directors

will be able to exert over the company. The exchange that is used is fixed from the time when the

transaction is being made.

2. Futures Contract

This is a legal agreement between two parties on the futures exchange trading floor. A

decision to buy or sell a commodity is reached and the transaction settled to take place in future.

They are normalized to enable trading on the futures exchange (Rice, DiMeo & Porter,

2012:2425). Both the payment and the delivery is made on the date agreed. The German

publishing house will be called the long hold Printers Ltd is a short position. It is a gamble to

compensate for the changes that are expected to take place in the future on the exchange rate of

the Pound against the Euro (Deventer, Imai, & Mesler, 2013:199). These are normally contracts

that are conducted in foreign currency. It was guaranteed on the transaction that was to be

conducted (Zhang, 2013:86). They agree to sell the Sterling at a constant rate in a period of six

months. The method is not meant for currency exchange as described, but it is a real settlement

that is based on a real exchange rate in a six month period.

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This method has its disadvantages and advantages. For the advantages we have good

coordination between goods and payments, management of liquidity is improved and the

flexibility of contract because the contract can occur at any time before the specified date is over.

3. Options Contract

Options contract can also be considered as a gambling contract. This is an agreement

between a buyer and a seller in which the purchaser is given the right to either buy or sell a

commodity at a later date at the agreed price (Bouchard & Chassagneux, 2016:170). This

hedging technique is a standardized technique implying that state the delivery methods, quantity

and the quality of commodities that are in the market so that every individual in the market can

see the same price on the commodity (Zhang, 2013:37). It is a zero sum game implying that

when someone loses a specific amount of money, then another person will get the same amount.

Despite it being also a gamble, the possibility of retaining control of the company is

regained. The disadvantage of this is made because it involves paying a premium which acts as

the cost. This option gives the right of selling the Pounds in a period after six months. However,

they are not obligated by any agreement to do it. Strengthening of the Euro gives them a chance

of selling it immediately while when it's weakening should be avoided.

Conclusions

Since it is expected that the strength of the Euro would increase, the possibility of using

the risk method is removed. Mostly, this type will make the Germany publishing house to pay

fewer amounts when compared to what Printers Ltd will receive in Pounds. It can also prevent

the German company from paying the amount required. The futures contract is to remove all the
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risks and fix the rate of foreign exchange now. The FRA is the is the easiest to use. Besides, this

type of transaction involving would incur the least fees.

The hedging technique used will depend wholly on the prevailing conditions. In this case,

I would advise the directors to use the future rate agreement so as to protect the business from

uncertainty in the market conditions.

To avoid penalties in the above method, the funds must have been assured to be in the

account. Should we be prepared to give a payment at the rate mentioned or the premium, then we

can make a profit as the Euro strengthens while the Pound weakens. In conclusion, the final

choice that we are to use is determined by the how the directors view risks that a business makes.
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References

Bekaert, G., & Hodrick, R. J. (2014). International financial managemen. Upper Saddle River

(N.J.): Pearson.

Bouchard, B., & Chassagneux, J. (2016). Fundamentals and advanced techniques in derivatives

hedging. Cham: Springer International Publishing Switzerland.

Byrd, M. J. (2017). Small business management an entrepreneur's guidebook. New York, NY:

McGraw-Hill.

Corelli, A. (2015). Understanding financial risk management. London: Routledge.

Deventer, D. R., Imai, K., & Mesler, M. (2013). Advanced financial risk management: tools

& techniques for integrated credit risk and interest rate risk management.

Hoboken, NJ: Wiley.

Goss, B. A. (2014). Futures markets: their establishment and performance. London: Routledge.

Javier, P. G. (2017). Financial Risk Management: Identification, Measurement and

Management. Cham: Springer International Publishing.

Kensinger, J. W. (2012). Research in finance. Bingley: Emerald.

Larkin, R. F., & DiTommaso, M. (2015). Wiley not-for-profit GAAP 2015: interpretation and

application of generally accepted accounting principles. Hoboken, NJ: John Wiley &

Sons Inc.

Lasserre, P. (2012). Global strategic management. Basingstoke, Hampshire: Palgrave

Macmillan.

Longenecker, J. G., Petty, J. W., Palich, L. E., & Hoy, F. (2017). Small business management:

launching & growing entrepreneurial ventures. Boston, MA: Cengage Learning.

Mullins, J. (2014). The Customer-Funded Business: Start, Finance, or Grow Your Company with

Your Customers' Cash. Hoboken: Wiley.

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Rice, M., DiMeo, R. A., & Porter, M. (2012). Nonprofit Asset Management: Effective Investment

Strategies and Oversight. John Wiley & Sons.

Shapiro, A. C., & Moles, P. (2014). International financial management. Chichester: John Wiley

& Sons, Inc.

Stimpson, P., & Smith, A. (2015). Business management for the IB Diploma. Cambridge:

Cambridge University Press.

Sutton, G., & Detweiler, G. (2015). Finance your own business: get on the financing fast track.

Minden, NV: Succes DNA, Inc.

Zhang, J. (2013). CCAR and beyond Capital Assessment, Stress Testing and Applications.

London: Risk Books.

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Appendix

Printers Ltd Now

Money Now 6 months

market time

Hedging

Invest Euro pay 2,000,000

Buy Rate 1.261

Borrow 8

Pound repa 1,299,636

Rates Pound Euro

Deposit 1.2% 0.5%

Borrow 3.5 % 2.5%

Sterling spot 1.2524 1.2575

rate

Futures 1,5453

Contract

Number of contracts: 2m/1.2524/62,500 = 21 contracts

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If you Buy Euro 2m at spot c1.3729 1,456,77

strengths 0

Gain on contracts: 62,500 x 21 (1.5433 - 162,903

1.3729)/1.3729 162,903

1,293,86

y1.6779

If Euro Buy Euro2m at spot 1,191,96

weakens 6

Loss on contracts: 62,500 x 21 (1.6779 - 105,288

1.5433)/1.6779

1,297,25

Options

contract

Number of contracts: 2m/1.2524/62,500 = 21 contracts

We will purchase putoption giving the right to sell pounds (buy Euros) at the strike price

1,294,247

If Euro strenghtens Buy Euro 2m at strike .00 15,40

Premium payable: 62,500 x 21 x 1,309,649

0.0179/1.2524
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If Euro weakens Buy Euro 2m at spot .00 1,191,966

Premium payable: 62,500 x 21 x 15,40

0.0179/1.2524 2

1,207,368