Financial Accounting Reports And Strategies: AB Plc Acquisition Essay.

Define, analyse, synthesise, critically discuss and interpret financial accounting reports and strategies and key concepts and comparative models, and their relationship to financial strategy and decision making within businesses and organisations.

Identify, analyse and evaluate financial business and enterprise positioning within the contexts of corporate investment, asset management, decision making and strategy, and economic, legal and tax environments.

Obtain the annual reports of the company and one of its main competitor for the latest five years from its website or other sources.

Write an introductory report on the activities of the company and its position in the industry with respect to its competitor.

Critically compare and analyse their financial performance over the last five years. If you were going to buy one of these companies’ shares, which one would you choose? Explain your reasons.

AB plc is a listed company, which operates in the construction of residential property. It is currently financed principally by equity. Its board of directors is currently considering purchasing all the shares of an unlisted company, which will allow it to expand into a new geographical region. The price being asked by the shareholders of the unlisted company equals about of market capitalisation.

Suggest 4 alternative methods of funding to the board of directors of AB plc debating critically the reasons for using each of these methods of funding. All the relevant factors must be explained and placed clearly in the context of the particular circumstances of AB plc.

Critically discuss the link between the above financing decision and investment decision relating to the acquisition of the unlisted company.

Financial Performance Analysis of AB plc and its Competitor

This case depict about a company which is trying to buy the shares of an unlisted company. In this report, various ways has been analyzed through which the company could enhance the funds and raise the funds from various available sources. In this report, AB plc’s case has been studied and it has been found that this company is trying to acquire an unlisted company to grab the market share and entire into the new geographical area. Further, it has been analyzed that the company would required some funds to offer the acquire condition and the contract to the unlisted company. The management of AB plc has said that do not have enough internal source to raise the funds. Now the company could only raise the funds from external sources which must be analyzed and identified by the company through investigating over various factors of the company.

This case depict that if the AB plc wants to acquire the unlisted company than company has to pay 25% of total market capitalization to the shareholders of unlisted company and thus it is a big amount for the company to raise and manage the funds and administer the financial position and the capital structure position of the company perfectly. Currently, the funding off the company s dome only through the equity stock to manage the risk of the company and company also finds it, the easiest way to manage and administer the position and performance of the company.

In this report, various ways of funding has been analyzed which could help the company to enhance the funds as well as the financial position of the company and further, it has been decided in this report that which factors and funds are the best option for the company to enhance and analyze the funds.  

Equity financing is the procedure of raising the funds through issuing the shares in the market. This financing essentially express that the ownership is sold by the company to raise the funds for the betterment of the business. Equity financing spans various activities in scope and scale from a few amounts which has been raised by the company from various other sources. Basically, a public and listed companies use this source to raise the funds from the market (Kruth, 2013). It is quite different from debt financing where the funds are raised by the company through borrowings.

Alternative Funding Methods for AB plc

Equity financing is the cheapest source and the most used source. In this the companies come up in the market with IPO and sale out its share in the market and through collecting the amount from selling the shares, they use the funds to manage the operations of the company to invest into the new activities of the company (Krantz, 2016). For raising the funds from equity financing, company is just required to announce the new shares. The share price of the stock varies according to the comapny position in the market and the economical position of the country.

According to Kinsky (2011), it is the best option for every company to analyze the market position and make a better decision about financing accordingly. Hongren (2009) has depicted into his study that the fund rising from equity is the risk less option because in this position, the company is not required to pay back the amount to the shareholders. Further, it has also been found through the study of Hopper, Northcott and Scapens, (2007) that if the funds are raised by the company through the equity than the solvency position of the company becomes better as the extra expenses of interest would not be there also.

In case of AB plc, it has been found that currently the comapny has raised the funds from equity only. The decision of principally financed by the equity is the best option for the company as the risk level of the company would be lesser and the funds could also be raised by the company easily (Hansen, Mowen and Guan, 2007). Further, this option is also good for the company as the debt obligation of the company would be lesser and the net profit of the company would be higher. AB plc could concern about this financing option to raise and manage the funds for the acquirement of an unlisted company and pay to its shareholders.

Debenture financing is the procedure of raising the funds through issuing the debentures in the market. This financing essentially express that the funds are borrowed by the company to raise the funds for the betterment of the business. Equity financing spans various activities in scope and scale from a few amounts which has been raised by the company from various other sources. Basically, public and listed companies as well as private companies use this source to raise the funds from the market (Hansen, Mowen and Madison, 2010). It is quite different from equity financing where the funds are raised by the company through selling the ownership.

Link between Financing and Investment Decisions

Debenture financing is bit costly but the most used source. In this the companies come up in the market with debts and sale out its debts in the market and through collecting the amount from selling the debentures, they use the funds to manage the operations of the company to invest into the new activities of the company (Garrison, Noreen, Brewer and McGowan, 2010). For raising the funds from debentures financing, company is just required to announce the new debentures in the market. The premium and discount over the debentures varies according to the comapny position in the market and the economical position of the country.

According to Elton, Gruber, Brown and Goetzmann, (2009), debentures are way better for every company to analyze the market position and raise the funds through debentures in the market. DRURY (2013) has depicted into his study that the fund rising from debenture is the bit risky option because in this position, the company is required to pay back the amount to the debt holders after a particular period of time. Further, it has also been found through the study of Bhimani, Horngren, Datar, and Foster, (2008) that if the funds are raised by the company through the debt than it also make an impact over the capital structure of the company so company must look over the financing option and make a better decision accordingly.

In case of AB plc, it has been found that currently the comapny has raised the funds from equity only. The decision of raising the funds from debentures could be the best option for the company as the capital structure of the company would be maintained as well as the return could also be lesser by the company (Zimmerman and Yahya-Zadeh, 2011). Further, this option is also good for the company as the dividend payout ratio of the company would be lesser and the net profit of the company would be higher. AB plc could concern about this financing option to raise and manage the funds from the acquirement of an unlisted company and pay to its shareholders.

Term loan is the procedure of raising the funds through borrowing the funds from bank, government and financial institution. This financing essentially express that the property or some other assets could be mortgaged by the company to bank, government and financial institution to raise the funds for the betterment of the business (ward, 2012). Term loan financing spans various activities in scope and scale from a few amounts which has been raised by the company from various other sources. All the companies whether it is public private, partnership or sole proprietorship could use this source to raise the funds from the market. It is quite different from debt financing and equity financing in which the funds are raised by the company through borrowings from debentures and through selling the ownership in the market (Weaver, Weston and Weaver, 2001).

Term loan is the a cost consuming source as the company is required to analyze the credit score through a credit rating company and then only it could be applicable to take a loan from bank, government and financial institution. In this the companies come up in the market with a good rating score and ask for the money to bank, government and financial institution s that they can use those funds to manage the operations of the company to invest into the new activities of the company (Needles, Powers and Crosson, 2013). For raising the funds from term loan, company is just required to manage and enhance the credit score and they have some asset and property which could be mortgaged.

According to Moles, Parrino and Kidwekk, (2011), term loan could be a best option for the company to analyze and enhance the funds for the opportunities and various investments by the company. Lumby and Jones, (2007) has depicted into his study that the fund rising from term loan is a riskier option because in this position, the company is required to pay back the amount to the financer after a period of time. Further, it has also been found through the study of Kaplan and Atkinson, (2015) that if the funds are raised by the company through the term loan than the capital structure of the company becomes better as the dividend payout ratio of the company would be lesser.

In case of AB plc, it has been found that currently the comapny has raised the funds from equity only. The decision of raising the funds through term loan could be the best option for the company as the risk and return level of the company could be balanced and the management of the funds could also be done properly (Horngren, 2009). Further, this option is also good for the company as the debt obligation of the company would be according to the equity of the company and the net profit of the company would be higher. AB plc could concern about this financing option to raise and manage the funds from the acquirement of an unlisted company and pay to its shareholders.

Asset securitization is the procedure of raising the funds through pooling various types of debt on contractual basis such as residential mortgages, auto loans, commercial mortgages, credit card obligations etc. This financing essentially express that the property or some other assets could be mortgaged by the company to raise the funds for the betterment of the business. Asset securitization financing spans various activities in scope and scale from a few amounts which has been raised by the company from various other sources. All the companies whether it is public private, partnership or sole proprietorship could use this source to raise the funds from the market (Hoque, 2002). It is quite different from debt financing and equity financing in which the funds are raised by the company through borrowings from debentures and through selling the ownership in the market.

Asset securitization is the a cost consuming source as the company is required to analyze all the mortgages property and make a decision about financing and raising the funds accordingly. In this the companies come up in the market with a good portfolio of the asset and ask for the money to bank, government and financial institution so that they can use those funds to manage the operations of the company to invest into the new activities of the company (Hansen, Mowen and Guan, 2007). For rising the funds from asset securitization, company are just required to manage and enhance the good portfolio of the asset and manage that portfolio is a proper manner in the market to enhance the funds.

According to Garrison, Noreen, Brewer and McGowan, (2010), asset securitization could be a best option for the company to analyze and enhance the funds for the opportunities and various investments by the company. Deegan (2013) has depicted into his study that the fund rising from asset securitization is a riskier option because in this position, the company is required to pay back the amount to the financer after a period of time. Further, it has also been found through the study of Davies and Crawford, (2011) that if the funds are raised by the company through the asset securitization than the capital structure of the company becomes better as the dividend payout ratio of the company would be lesser.

In case of AB plc, it has been found that currently the comapny has raised the funds from equity only. The decision of raising the funds through asset securitization could be the best option for the company as the risk and return level of the company could be balanced and the management of the funds could also be done properly (Daft and Samson, 2014). Further, this option is also good for the company as the debt obligation of the company would be according to the equity of the company. AB plc could concern about this financing option to raise and manage the funds from the acquirement of an unlisted company and pay to its shareholders.

Through the above analysis over the 4 source of the finance through which the AB plc could raise the funds for the betterment and for acquiring an unlisted company, it has been found that all the sources are better at their place. Every source has some pros and cons which impact over the position and performance of the company (Damodaran, 2011). According to this analysis, it has been found that the company must analyze all the point according to their nature and the requirements and must select the best option from the market to enhance the funds to get the amount for the unlisted company’s shareholders. All the sources of finance have been given below:

According to this option, the company must raise this fund by selling the new shares in the market to enhance the liquid position of the company so that company could repay the amount to the shareholders of the unlisted companies. This source depict that it is bit easier for the company to manage and analyze the funds and maintain the financial performance of the company as well. The financing from equity and investment into the unlisted company could be a better option for the company as if company want then it could also give the shares of the company against of the unlisted company’s share (Crowther, 2007).

This opportunity of investment is quite beneficial and better opportunity for the AB plc to enter into the new market and grab the opportunity from the market. This financing opportunity depict that the risk of the company would be lesser and this investment would offer the high return to the company with less associated risk. So this option could be the best option for the company to raise the finance and invest into the available opportunity of the company.

According to this option, the company must raise this fund by borrowing the funds from the debentures in the market to enhance the risk and return position of the company so that company could repay the amount to the shareholders of the unlisted companies. This source depict that it is bit easier for the company to manage and analyze the funds and maintain the financial performance of the company as well. The financing from debentures and investment into the unlisted company could be a better option for the company, it would also help the company to manage and analyze the best opportunity and source of the company (Crosson and Needles, 2013).

This opportunity of investment is quite beneficial and better opportunity for the AB plc to enter into the new market and grab the opportunity from the market. This financing opportunity depict that the risk of the company would be higher and this investment would offer the high return to the company with less associated risk. So this option could be the best option for the company to raise the finance and invest into the available opportunity of the company.

According to this option, the company must raise this fund by approaching the financial institution to raise the funds from the term loans to enhance the financial position of the company so that company could repay the amount to the shareholders of the unlisted companies. This source depict that it is bit easier for the company to manage and analyze the funds and maintain the financial performance of the company as well. The financing from term loans and investment into the unlisted company could be a better option for the company as if company want then it could also give the shares of the company against of the unlisted company’s share (Bierman, 2010).

This opportunity of investment is quite beneficial and better opportunity for the AB plc to enter into the new market and grab the opportunity from the market. This financing opportunity depict that the risk of the company would be bit higher and this investment would offer the high return to the company with high associated risk. So this option could be a good option for the company to raise the finance and invest into the available opportunity of the company.

According to this option, the company must raise this fund by securitising the assets and make a portfolio of the assets in the market to enhance the financial performance of the company so that company could repay the amount to the shareholders of the unlisted companies. This source depict that it is bit easier for the company to manage and analyze the funds and maintain the financial performance of the company as well (Bromwich and Bhimani, 2005). The financing from asset securitization and investment into the unlisted company could be a better option for the company as if company want then it could also give the shares of the company against of the unlisted company’s share.

This opportunity of investment is quite beneficial and better opportunity for the AB plc to enter into the new market and grab the opportunity from the market. This financing opportunity depict that the risk of the company would be higher and this investment would offer the high return to the company with high associated risk. So this option could be a good option for the company to raise the finance and invest into the available opportunity of the company.

Conclusion:

According to the above analysis and the study, it has been found that all the sources could be used by the comapny to manage and enhance the funds from the market but there are various other points which could also be used by the company to manage and enhance the position and the financial performance of the company.

Through the above analysis, it has been found that the debentures and the bank loan is the best option for the company to enhance the funds as it would offer the higher return to the company in less associated risk as well as the capitals structure of the company would also be better through enhancing the funds via debentures and the term loans. So, the AB plc must grab the opportunity through acquiring the unlisted company and for raising the funds, company could use the debenture source as well as term loan.

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