Sources of Finance and Investment Appraisal

Assignment Brief

CASE STUDY – COCO LIMITED

Coco plc is a public limited company, whose shares are quoted on the Alternative Investment Market in London and has been operation in the UK for the past 5 years. Coco plc provides intellectual property to Financial services, HR consultants, Marketing companies, Tourist companies and investment property funds all over the UK. For the past 5 years, Coco plc has been a profit making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the Finance director of Coco has recently engaged your firm to help them source Finance for their expansion plans.

Requirement:

You will be required to write a management report to the management of Coco limited directors in which the following points should be discussed.

• Provide an explanation on the different sources of funding the company can have and their advantages and disadvantages and make recommendations as to how the company can manage the same to help in the planned expansion program.
• Analyse the Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Coco may use, and the limitations of using those techniques
• The use of management tools such as Breakeven analysis and Budgets.
• A computation of your breakeven analysis and the cash budget for the first 3 months.
• An evaluation of the estimated company performance or position during the same period
• A detailed Literature Review of the tools you have used such as breakeven analysis and budgets and their importance to business.
• Other issues for management to consider that you think are vital for them to survive and make a profit.

Sample Answer

Sources of Finance and Investment Appraisal for Coco plc

Introduction

Finance is one of the most important resources for any business. Without adequate funds, organisations are unable to start new projects, expand operations, or even maintain day-to-day activities. Coco plc, a company planning to expand and develop new projects, must carefully consider where its finance comes from and how investment decisions are made. This discussion explores the different sources of finance available to the company and examines investment appraisal methods that can be used to judge whether a project is financially worthwhile.

The analysis uses straightforward language to explain both concepts, with examples and implications tailored to Coco plc. By examining both finance and investment appraisal, the study aims to provide a clear and practical understanding of how the company can grow while managing financial risks.

Sources of Finance

Coco plc has several options when it comes to raising money. Each source comes with advantages and disadvantages, and the choice often depends on the company’s current position, the size of funding required, and the level of control the owners are willing to give up.

Equity Finance

Equity finance refers to money raised by issuing shares to investors. Since Coco plc is not listed on the London Stock Exchange’s main market, it could consider listing on the Alternative Investment Market (AIM). AIM is designed for growing companies and is more flexible than the main market, making it attractive for businesses like Coco plc.

By selling shares, the company can raise large sums of money without taking on debt. Another benefit is that investors share the risk, which reduces the pressure on the company if profits are lower than expected. However, issuing shares reduces ownership control. New shareholders have voting rights and expect regular dividends, which can create pressure to meet short-term performance targets.

Equity finance is therefore attractive for long-term expansion but may not be ideal if the owners of Coco plc wish to keep full control of the business.

Debt Finance

Debt finance includes bank loans, overdrafts, and issuing bonds. Unlike equity, debt allows Coco plc to keep ownership. Banks or investors lend the company money, which must be repaid with interest. A major benefit is that interest payments are tax-deductible, which reduces the effective cost of borrowing.

However, debt finance increases the company’s financial obligations. Fixed repayments must be made even when profits are low. If Coco plc over-borrows, it could face liquidity problems and risk insolvency. Lenders may also impose restrictions, known as covenants, on how the company operates.

Debt can be a powerful tool when used carefully, especially for projects with predictable cash flows. It is best when balanced with other sources to avoid excessive risk.

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