Professional Documents
Culture Documents
Conclusion ...................................................................................................................................... 7
References ....................................................................................................................................... 8
1. Sources of finance
The business unit has an access to various financing option through which funds
requirement can be met. List of sources that are available to business unit for acquiring finances
are mentioned and described in brief underneath.
Bank Loans: This is the financing option that enables business unit to acquire funds by
way of easy bank loans available. The source of finance enables to meet business requirement for
both long term and short term (Nogueira, Jorge and Oliver, 2013). It assists in increasing
business capital in the form of debt and carries specific rate of interest. Cost of capital in the
form of interest rates is charged as per the credit worthiness of organization. The alternative is
suitable for business units with low leverage position and high credit worthiness. In addition, the
company should also be capable of making interest payments on regular basis and repayment
after specified duration of time.
Debentures and corporate bonds: The public listed companies have option to increase
leverage in the organization by issuing debentures and bonds. This is a financing option with
high amount of costs in the form of floating cost and interest expenses. The option is suitable for
raising funds for long term and meets requirement of large amount of funds (Bierman and Smidt,
2003). It is the costliest financing option and is suitable in limited circumstances.
Retained earnings: Every business unit irrespective of their size creates reserve and
surplus fund for making utilization within the organization. This funds are saved in the form of
Capital structure
30712
Debt
46980
Equity
As per the ideal ratio of 1:2; equity should be double of debt. In present case the
organization has employed equity lower than debt. The business unit henceforth should increase
equity capital so as to be at least at equivalent level to that of debt. In order to improve stability
position of the business unit equity capital should be employed. It is through issue of more
amount of equity shares or utilization of retained earnings that business unit will be able to infuse
more amount of funds in the form of owner's capital (Nogueira, Jorge and Oliver, 2013).
In order to acquire funds for long term through external source of financing; the business
unit should opt for issuing equity capital. The financing option although involves dilution of
ownership; it helps in meeting financial requirement of business unit without any obligation for
Conclusion
The report is an attempt made to analyze the manner in which long term financing
requirement of business unit can be satisfied. The report through analysis of case for EDF energy
brings forth the fact that money should be infused through appropriate sources of finances. The
report discussed above brings forth various sources of finances and their respective implications.
It is through analysis of financing options on the basis of various factors that affect financing
decision; the business unit can decide most suitable source of finance. Moreover, the nature of
business unit and its requirement should also determines most suitable financing option. The
evaluation through out report concludes that EDF energy should acquire funds by way of raising
equity capital. It is due to the fact that business unit requires funds for long term and its capital
structure suggest high leverage position of the business unit.
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