Madam: Equity Finance Essay

Submitted By hellothere3
Words: 2140
Pages: 9

To: Diamond Way Pty Ltd
From: "Name"
Re: Business advice on Diamond Way Pty Ltd

Executive summary
A Diamond way is wanting to expand, it is important to consider the extent of the expansion, as well as how much money is needed to expand to the rate in comparison to the amount of money the business has already in equity. Once this is decided Diamond way has to look at all of its options of managing the money for expansion, through; equity finance, debt finance, gearing and leasing. As Diamond way is looking at expanding the business and possibly looking at opening another store, the operations function, human resource cycle and marketing should be carefully looked at and understood if the new store is to be successful. The best advice for Diamond way would be to consider the gearing use of finance as it would be the most suitable approach for Diamond way to control its finances.

Funding options
As Diamond Way has explained that it is wanting to expand and open a new store, it is important that Diamond way understands the different finances available. This can be done through debt and equity finance, which would be considered the two main ideal ventures that the business could make. However, there are other forms of finance that are covered through debt and equity finance, of; dibentures, bank loans and reinvested profits of the business. When deciding on the funding options of the business, gearing should also be considered, as it is often the most suitable and sensible option. It is the responsibility of the financial manager to determine the most appropriate combination of debt and equity finance.

Debt finance
Debt finance are the funds that have been borrowed and need to be repaid. There are two types of debts, short term and long term. Short-term debt may be used in managing, short-term financial needs, cash flow and working capital. Short-term borrowings alone are not suitable for long term financing. Shot-term borrowings include; bank overdrafts, which are a permanent facility attached to a bank account whereby a business can overdraw the account. Long-term borrowings; such as a mortgage, is a secure loan on interest, and has the lowest rate of interest of all of the loans. It has a fixed term of usually 10-30 years.

There are both advantages and disadvantages of debt finance, advantages include; Debt finance is often easy to obtain and can generally be organised at short notice, it is a flexible source of finance, convenient, interest payments are tax deductable to the business and debt holders do not necessarily have an interest in the business and there for do not have any rights and decision making ability in the business. However, there are also disadvantages that com with debt finance, which include; interest payable fees and bank charges, the business is at higher risk of not being able to meet its liabilities, repayments must e made on the due date, the business remains exposed to risk of interest rate rises leading to high debt repayments, and businesses may risk having any non-current asset used as security loss if they cannot meet loan payments.

Diamond way should to some degree use debt finance as the firm would need a large sum to expand its business, however it should also be a sum that is able to be regularly repayed with interest. Diamond way should not only consider the advantages associated with debt finance but also, highly consider the disadvantages. To fund expansion, which will cost $600 000, Diamond way, should consider a long term loan, perhaps a mortgage for the new store, however for the additional $200 00, apart from the mortgage, Diamond way should try to fund through equity.

Gearing, otherwise known as leverage, is the relationship between the level of debt and the level of owners equity in a business. Diamond way is currently geared with debt to equity ratio of 60:40. While businesses must take care not to become overly relient on debt finance, most business