Managing Financial Resources and Decisions

executive director summary This written report is to propose an allow bully mental synthesis for Xpresso joyousness Limteds rail line elabo investness with the minimum amount of expectant as US$ 30 billion. In site to hand that goal, firstly, it is pass to identify the ancestrys of pay available for the business as debt backing which include contri notwithstandinges, debentures and marrys and lawfulness fiscal support, which includes vernacular sh ars, appreciation sh ars and retained get ahead.It is as vigorous to discuss receiptss & dis services of individually citation, as easily as to assess the implications of these different bases related to to try, heavy, pecuniary and dilution of subordination and nonstarter. Based on those analyses, it is to select the appropriate germs of pay for the project including retained win, common and predilection shargons and loans. Whats more, the termss involved with each source will be assessed and com pargond in order to form the best alternative of pileus social organisation.thither be three options of big(p) coordinate proposed 50% debt funding and 50% right including 80% common component part and 20% gustation mete outs 25% debt backing and 75% righteousness fiscal support including 80% common components and 20% choice lots 10% debt financial support and 90% equity pay including 80% common sh bes and 20% orientation sh atomic number 18s Besides, this report is as well as to mention and explain the splendor of financial cooking for Xpresso circumscribed. CONTENTS Page 1.Cover Sheet . . 1 2. Executive Summary 4 3. origin . .. 7 4. Main Body . 8 4. 1 forthcoming divers(a) sources of pay.. 8 4. 1. 1. Debt financing. 8 4. 1. 1. 1. Loans.. 8 4. 1. 1. 2. Debentures. 8 4. 1. 1. 3. Bonds.. 9 4. 1. 2. Equity financing. . 9 4. 1. 2. 1. Issued shargon bully9 4. 1. 2. 2. unbroken up(p) meshwork & different reserves.. 10 4. 2. Assessment of the implic ations of sources10 4. 2. 1. Debt financing. . 10 4. 2. 1. 1. Debentures 11 4. 2. 1. 2. Bonds.. 12 4. 2. 2. Equity financing. .. 12 4. 2. 2. 1. Issued sh ars12 4. 2. 2. 1. 1. Common shares. . 12 4. 2. 2. 1. 2. Preference shares 13 4. 2. 2. 2. retained amplification. 13 4. 3. Selection of appropriate sources & The assessment and comparison for make ups. 4 4. 3. 1. Appropriate sources of pay 14 4. 3. 2. make ups of sources.. . 14 4. 3. 2. 1. Retained profit .. . 14 4. 3. 2. 2. Issued shares.. . 14 4. 3. 2. 3. Loans.. . . . 15 4. 3. 3. Options of capital social organization.. 15 4. 3. 3. 1. outgrowth structure.. . . 15 4. 3. 3. 2. Second structure.. . . .. 16 4. 3. 3. 3. Third structure.. . .. 16 4. 4. The financial final ca intentionning .. 17 4. 4. 1. Definition.. . 17 4. 4. 2. Importance for Xpresso restrict.. .. 17 4. 4. 3. Shortage & surplus of capital . 17 5. Conclusion . . . . 19 6. Appendix .. 20 7. References. 21 3. INTRODUCTION Xpresso enamour circumscribed is a pu blicly listed participation in Australia Stock Exchange with the headquarter is base in Hanoi, Vietnam. Xpresso Delight confine is volume owned (51% stake) by kief Executive Officer (CEO), Mr.Nguyen ding Khoa. The caller-out has 30 cafes concent orderd chiefly in big cities in Vietnam like Hanoi, Ho Chi Minh City, Hai Phong, Da Nang, Can Tho and so on. With many advantages such as the growing affluence of java culture, the increasing expatriates population in Vietnam, and compensate the presidential terms pro-business policies Xpresso limited believes that thither is an immense foodstuff dominance in the emerging Vietnam, which encourages it to enrol on an ambitious plan of expanding, opening at to the lowest degree 20 cafes each social class for the adjoining five years in the various parts of the country.The caller foreshortens two kinds of share including common shares (par comfort US$ 1 per share), which are currently traded at US$ 2. 50 per share and pref erence shares, which are currently traded at US$ 52 per share in Australia Stock Exchange. Its corpo identify levy stray is 25% at demo save is expected to go down. With strong cabbage growth intercommunicate at a constant 15% per annum in the future, Xpresso Delight Limited is expected to pay by US$ 0. 30 per share as ordinary dividend in the next financial year opus a constant preference dividend is US$ 5 per share per year.The average flotation address for the upstart electric outlet of ordinary shares and preference shares are 17% and 10% of the gross proceeds respectively. For new divulge of ordinary shares and preference shares, Xpresso Delight Limiteds issue price will be band at their respective current market price as traded in the Australia Stock Exchange. Xpresso Delight Limiteds before-tax exist of debt is 15%. 4. MAIN BODY 1. easy various sources of pay In the look of Xpresso Limited, as a large confederation with stable profit growth looking for capi tal to expand, it is solitary(prenominal) necessary for long-term financing to be taken into account.Therefore, in that location are two principal sources of finance available to Xpresso Limited including debt and equity financing. 4. 1. 1. Debt financing In regards to debt financing, the simplest representing is acceptation m wholenessy on character with a promise to repay the amount borrowed, plus refer18. There are many faces of debt financing, including borrowing from banks in terms of loans or borrowing from investors in terms of debentures, bonds 4. 4. 1. 1. 1. Loans A loan is a financial work in which one party the lender agrees to give a nonher party the borrower an amount of property which essential be paying(a) back in full16.With a proper finance profile and the support of Vietnam government pro-business policies, it is easier for Xpresso Limited to borrow from commercial-grade banks such as Vietcombank, VietinBank and so on. For example, the supportive entertain rate of loans in Vietnam at present is fluctuating between 5 and 6 percent per year14, thence if Xpresso Limited. borrows US$ 10,000, the pursual it has to pay back will be between US$ five hundred and US$ 600. 4. 1. 1. 2. Debentures It is a carry for Xpresso to mobilize capital from investors setting out the terms of loans, endorse by its reputation besides non collateral12.Investors can be individuals, Vietnam and foreign financial institutions such as Vina cracking, BankInvest and so on and even Vietnam commercial banks are the main investors in organizational debentures. Beca subroutine of its high stand in the market, investors and other creditors are unstrained to purchase once Xpresso Limited issues debentures. As in the Vietnam present market , the common chase rate of debentures issued by enterprises is 12. 5 percent per year11, if Xpresso issues debentures of US$ 10 one thousand thousand for 5 years, it has to pay investors the positive bear on of US$ 6. 5 meg. 4. 1. 1. 3. Bonds Bonds are large debts which are unremarkably paid off over a period of 10 to 35 years1. Simply explaining, in bond financing, Xpresso mobilizes capital from investors instead of banks by selling bonds to them with a promise to pay back with interest, according to specify schedules8. As an example, if Xpresso issues bonds at an interest rate of 6%, the interest over 20 years would be approximately US$ 0. 73 for each dollar borrowed. 4. 1. 2. Equity financingIn terms of equity financing, equity capital familiarly is represent of funds that are raised by Xpresso in substitute for an self-will interest in the company17. Since it is proprietors equity, the company does not break to worry about any liability to repay interest or loans for other parties. There are two study sources of equity financing including issued share capital and retained profit & other reserves12. 4. 1. 2. 1. Issued share capital Issued share capital is capital that is subscr ibed by shareholders when they purchase shares Xpresso Limited issues, including common and preference shares4.Common shares are shares issued to the general public in the stock market, while preference shares are shares issued to some special people (for example, banks or specific institutions)2. 4. 1. 2. 2. Retained profit & other reserves Retained profit is simply profit that has been unbroken within Xpresso Limited rather than paid out to shareholders as dividends 2. 2. Assessment of the implications of sources of finance to Xpresso Delight Limited related to risk, legal, financial and dilution of picture and loser 4. 2. 1. Debt financingAs being categorized in debt financing, those various types including loans, debentures and bonds control some implications to Xpresso in similarity, which are going to be discussed below. There are many advantages of Xpresso Limited for victimisation debt financing. There is no dilution of control since the creditors have no authority in running the company but just involve in the money they invest and they usually do not enroll in the superior earnings of the company e very as the cost of debts is limited 13. The virtually in-chief(postnominal) advantage is tax relief on interest as it is considered one kind of expenses3.For example, if Xpresso Limited borrows US$ 10,000 at the interest rate of 5%, it will have to pay the interest of US$ 500 but will be require down US$ 500 in the tax-incurred income. Whats more, in cadence of inflation, debts may be paid back with cheaper pesos13 since the money becomes worth less. To the existing shareholders, one advantage is when Xpresso Limited unfortunately goes broke, they may overlook their investment but other personal possessions are honest 2. However, apply debt financing besides has disadvantages. Obviously, debts tally up risk to the company12.There is a risk of not having enough money to pay by the maturity look or if the earnings of Xpresso Limited fluctu ate 12 either of which easily checks the company become bankruptcy. To add more, the legal of debt financing in Vietnam is relatively complicated 2, and authentic managerial prerogatives are usually tending(p) up in the bonds indenture dilute (for example, specific ratios essential be kept above a certain level during the term of the loan)13. Besides, debentures and bonds likewise have their own characteristics. 4. 2. 1. 1. DebenturesOne advantage of using debenture financing is that Xpresso Limited does not have to give collateral9. However, it withal has disadvantages as it must compete with government loan stocks (gilts), what are the dominant type of debentures in Vietnam market, so the company must generally offer a higher(prenominal) rate of interest than the one on gilts to attract investors4. The legal issue of debentures that Xpresso Limited has to concern is that if a bond disrespects, investors are entitled to the liquidation proceeds of holding bought with the money they invest (by purchasing debentures)5. . 2. 1. 2. Bonds Bonds have fixed interest and are issued for long-term1. One advantage of using bond is that substantial flexibility in the financial structure is enhanced by debt through the comprehension of call provisions in the bond indenture13. In case of financial distress, bondholders have greater claims of the issuers income than shareholders6. 4. 2. 2. Equity financing 4. 2. 2. 1. Issued shares The legal aspect involved is that shareholders are also owners of the company4.Therefore, the business ownership is weaken and it is possible to lose the control of the business for investors. However, there is also an advantage that there is large effectiveness membership to provide capital and to share risks of loss, bankruptcy and so on. There is a part of profit of the company distributed to shareholders as dividends. One significant advantage of using issued share capital is that Xpresso may deduce the dividend if acquire are insufficient. One disadvantage is that cash dividends are not tax deductible. 13) Besides, each type of shares also has its own characteristics. 4. 2. 2. 1. 1. Common shares The advantages of using common shares are that common dividend is based on profits when so that Xpresso Limited is free from worrying about not having enough money to pay there is no fixed maturity date for repayment of the capital and the sale of common shares is frequently more attractive to investors than debts as its look upon grows with the supremacy of the firm11. However, there are disadvantages as well. Shareholders ave right to vote, therefore the shareholders control and share in earnings are usually diluted13. If Xpresso decides to issue common shares, the stake of CEO (51% at present) will be tailord as the number of shares join ons. In terms of finance, issuance of common shares requires higher underwriting cost and the average cost of capital may increase above the optimal level when to a faul t much equity is issued13. 4. 2. 2. 1. 2. Preference shares Legally, like common share, preference shares represent a part of ownership or equity of Xpresso Limited4.Whats more, in case of financial distress, claims of preference shareholders must be well-off before common shareholders receive anything13. There is no default risk since non-payment of dividends does not necessarily mean bankruptcy. Preference dividend is fixed so that the company can plan to pay. Preference shareholders have no vote rights except in case of financial distress, which means there is no dilution of control. Call features and provision of change posture may be included so Xpresso may exchange the issue if interest rates decline.There is one disadvantage that preference shares involve cumulative feature, which means in case Xpresso Limited does not have money to pay dividends in a particular year, the dividend keeps get added to the next years dividend until the it is able to pay. (13) 4. 2. 2. 2. Re tained profit There are advantages to using retained profit as a form of finance due to the absence of brokerage be (for example, merchant banks fees), its control and flexibility, and all gains from investment will pipe down ultimately belong to existing shareholders13.Besides, there are disadvantages as shareholders expectation of dividends may present a problem or insufficient earnings may be available4. 4. 3. Selection of appropriate sources of finance for a business project & assessment and comparison for various cost involved for each sources 4. 3. 1. Appropriate sources of finance As discussed above, it is proposed that Xpresso Delight Limited should use equity financing in forms of retained profit, issued share capital and debt financing in forms of loans in the capital structure.The main source that should be included is retained earning since it is the solidest source and has the least risk to the firm3. Issued shares and loans are the next choices as they bring many op portunities and a relatively conceivable number of risks as well as liabilities. 4. 3. 2. Costs of sources 4. 3. 2. 1. Retained profit Costs of retained earnings include fixed expenses such as wages, rent, materials, electricity and so on tax cost dividends (dividends are a cost of retained earnings as well as a cost of share capital) certain costs if invested in the short term as not needed immediately and also opportunity costs4. . 3. 2. 2. Issued shares Costs of the issued share capital include flotation costs, dividends (cash dividend and scrip dividends- dividends in the form of new shares) cost of providing shareholders or owners with information about the process of the business such as the cost of glossy financial reports, Annual General Meetings, audit fees and the administrative costs of company with legal and Stock Exchange requirements for manifestation of information to shareholders and also certain costs associated with investing them if not needed immediately4. 4. 3. 2. 3. LoansLoans have interest as the main cost. The rate of interest may either be fixed or variable but in the case of Xpresso Limited it is fixed. There are also other costs including an initial exhibition fee to cover lenders administrative costs on setting up the loan (checking references, setting up data on a computing device system and so on) factors charge direction for advancing funds non-financial costs involved in the kindred between the company and creditors (for example, Xpresso will be required to provide the creditor with regular information about the performance of the business)4.That kind of non-financial cost may pull in the uncomfortable feeling of being watched for the owner. Opportunity cost is also included in this case as well. For instance, instead of paying interest of US$ 10,000 a year the business could do something else with that US$ 10,000 that expertness help generate income. 4. 3. 3. Options of capital structure There are three alternative cap ital structures that could be taken into account. Based on the comparison between their advantages and disadvantages, the roughly appropriate structure would be chosen. . 3. 3. 1. First structure For the first structure, it is to use 50% debt financing and 50% equity including 80% common share and 20% preference shares. That means US$ 15 billion of debts, and US$ 15 million of equity including US$ 12 million of common shares and US$ 3 million of preference shares. The costs of sources are Rf = US$ 0. 167 million Rc = US$ 1. 84 million Rd = US$ 1. 69 million The come cost is 0. 167 + 1. 84 + 1. 69 = 3. 697 (US$ million) 4. 3. 3. 2. Second structureThe imprimatur structure is to use 25% debt financing and 75% equity financing including 80% common shares and 20% preference shares. That means US$ 7. 5 million of debts, US$ 22. 5 million of equity including US$ 18 million of common shares and US$ 4. 5 million of preference shares. The costs of sources are Rf = US$ 0. 25 million Rc = US$ 2. 81 million Rd = US$ 0. 84 million The total cost is 0. 25 + 2. 81 + 0. 84 = 3. 9 (US$ million) 4. 3. 3. 3. Third structure The third structure includes 10% debt financing and 90% equity financing including 80% common shares and 20% preference shares.That means US$ 3 million of debts, and US$ 27 million of equity including US$ 21. 6 million of common shares and US$ 5. 4 million of preference shares. The costs of sources are Rf = US$ 0. 3 million Rc= US$ 3. 32 million Rd = US$ 0. 34 million The total cost is 0. 3 + 3. 32 + 0. 34 = 3. 96 (US$ million) As analyse the costs and the advantages & disadvantages of the three structures, it is to be said that the second structure is the best capital structure to restrain for Xpresso Limited.Because although it does not has the lowest cost, the proportions of sources of finance included are the most appropriate option as the lot of debts used (25%) is not too high for adding risks to the company but also ensures for the financial le verage (the tax relief) to be used. In addition, the cost of finance in this structure is still relatively low. 4. 4. The financial planning 4. 4. 1. Definition In general, financial planning is the process of evolution strategies to help you manage your financial personal business so you can build wealth, enjoy life and achieve financial security5. . 4. 2. Importance for Xpresso Limited pecuniary planning involves achieving a balance between the requirements to minimize the risk of not having cash to pay creditors and the requirements to maximize the earnings made by using assets4. It plays a very important role in helping Xpresso co-ordinate and organize the internal system, set up little plans for using resources, as well as for paying debts and liabilities, develop strategies, and finally prepare for any potential incidents in the future7. For Xpresso, every transaction has to be well-planned to run the business efficiently. . 4. 3. Shortage & surplus of capital working capi tal surplus- the amounts of directly contributed equity capital in excess of the par take to be13 has a large impact on Xpresso Limited as it can be used to distribute as bonus dividends to shareholders, to reinvest as owners equity and it also helps to reduce the cost of capital mobilizing9. It helps gain more prestige for Xpresso but also gives more pressure on the management as they have a duty to use it effectively. Capital is one factor of production, therefore its shortage beats difficulties for Xpresso to operate and develop efficiently4.Even it can lead to bankruptcy if capital shortage is too large. 5. last It can be said that each and every source of finance has both advantages and disadvantages. The aim is to make use of the advantages and also to avoid the disadvantages of all sources. The best capital structure is to combine the appropriate sources to make the best use for the company. To conclude, the capital structure proposed is to use 25% debt financing and 75% equity financing including 80% common shares and 20% preference shares in estimated US$ 30 million of capital.The cost of finance is US$ 3. 9 million. The structure has a relatively cost of finance and also ensures to make use of all advantages as well as minimizes all disadvantages of sources of finance used for expansion. As preparing a circumstantial and well-organized financial planning, there is a high rate of success for the expansion and other further maturations of Xpresso Delight Limited Company. Appendix 1. Formula of cost debts + Before-tax cost Rdt = debts x 15% + After-tax cost Rd = Rdt x (1 t) Rd After-tax cost Rdt Before-tax cost t Corporate tax rate (t = 25%) . Formula of cost of issuing shares 1. Cost of issuing common shares Rc = Dc / Pc (1 ec) + g Dc dividend per share (Dc= US$ 0. 3) Pc value per share (Pc= US$ 1) ec flotation cost for ordinary share (ec= 17%) g rate of earnings growth (g= 15%) 2. Cost of issuing preference shares Rf = Df / Pf (1 ef) Df dividend per share (Df = US$ 5) Pf value per share (Pf = US$ 1) ef flotation cost for preference (ef= 10%) Reference 1. City & County of San Francisco (2002) Bond support Basics. San Francisco Controllers office 2.Communist party of Vietnam (2005) Procedure of borrowing from Vietnam bank for agriculture and rural development online. Updated 20 June 2005 accessed 29 November 2009. Available from http//www. cpv. org. vn/cpv/Modules/ discussion/NewsDetail. aspx? co_id=30592&cn_id=223635 3. Edexcel HNC&HND business (2004) trade environment, London BPP professional Education 4. Edexcel HNC&HND business (2004) Managing financial resources and decisions, London BPP professional Education 5. monetary News (1996) online. eFinancialNews Ltd cited 26 October 2009 .Available from Internet http//www. efinancialnews. com/&sc=TWTAM000GS 6. Financial planning defined (2005) online Financial Planning Association cited 25 October 2009. Available from Internet http//www. fpa. asn. au/FPA_Conten t. aspx? Doc_id=1056 7. Hong, P. (2007) Capital surplus- to distribute or not?. Saga online. Accession No. 362/GP-BC, 10 October, cited 1 December 2009. Available from http//www. saga. vn/Luatkinhdoanh/Luattrongnuoc/6794. saga 8. Hong, S. (2009) organisational debentures attractive to foreignManaging Financial Resources and DecisionsExecutive summary This report is to propose an appropriate capital structure for Xpresso Delight Limteds business expansion with the minimum amount of capital as US$ 30 million. In order to achieve that goal, firstly, it is going to identify the sources of finance available for the business as debt financing which include loans, debentures and bonds and equity financing, which includes common shares, preference shares and retained profit.It is also to discuss advantages & disadvantages of each source, as well as to assess the implications of these different sources related to risk, legal, financial and dilution of control and bankruptcy. Based on those a nalyses, it is to select the appropriate sources of finance for the project including retained profit, common and preference shares and loans. Whats more, the costs involved with each source will be assessed and compared in order to form the best alternative of capital structure.There are three options of capital structure proposed 50% debt financing and 50% equity including 80% common share and 20% preference shares 25% debt financing and 75% equity financing including 80% common shares and 20% preference shares 10% debt financing and 90% equity financing including 80% common shares and 20% preference shares Besides, this report is also to mention and explain the importance of financial planning for Xpresso Limited. CONTENTS Page 1.Cover Sheet . . 1 2. Executive Summary 4 3. Introduction . .. 7 4. Main Body . 8 4. 1 Available various sources of finance.. 8 4. 1. 1. Debt financing. 8 4. 1. 1. 1. Loans.. 8 4. 1. 1. 2. Debentures. 8 4. 1. 1. 3. Bonds.. 9 4. 1. 2. Equity financi ng. . 9 4. 1. 2. 1. Issued share capital9 4. 1. 2. 2.Retained profit & other reserves.. 10 4. 2. Assessment of the implications of sources10 4. 2. 1. Debt financing. . 10 4. 2. 1. 1. Debentures 11 4. 2. 1. 2. Bonds.. 12 4. 2. 2. Equity financing. .. 12 4. 2. 2. 1. Issued shares12 4. 2. 2. 1. 1. Common shares. . 12 4. 2. 2. 1. 2. Preference shares 13 4. 2. 2. 2. Retained profit. 13 4. 3. Selection of appropriate sources & The assessment and comparison for costs. 4 4. 3. 1. Appropriate sources of finance 14 4. 3. 2. Costs of sources.. . 14 4. 3. 2. 1. Retained profit .. . 14 4. 3. 2. 2. Issued shares.. . 14 4. 3. 2. 3. Loans.. . . . 15 4. 3. 3. Options of capital structure.. 15 4. 3. 3. 1. First structure.. . . 15 4. 3. 3. 2. Second structure.. . . .. 16 4. 3. 3. 3. Third structure.. . .. 16 4. 4. The financial planning .. 17 4. 4. 1. Definition.. . 17 4. 4. 2. Importance for Xpresso Limited.. .. 17 4. 4. 3. Shortage & surplus of capital . 17 5. Conclusion . . . . 19 6. Appendix .. 20 7. References. 21 3. INTRODUCTION Xpresso Delight Limited is a publicly listed company in Australia Stock Exchange with the headquarter is based in Hanoi, Vietnam. Xpresso Delight Limited is majority owned (51% stake) by Chief Executive Officer (CEO), Mr.Nguyen Dong Khoa. The company has 30 cafes concentrated mainly in big cities in Vietnam like Hanoi, Ho Chi Minh City, Hai Phong, Da Nang, Can Tho and so on. With many advantages such as the growing affluence of coffee culture, the increasing expatriates population in Vietnam, and even the governments pro-business policies Xpresso limited believes that there is an immense market potential in the emerging Vietnam, which encourages it to embark on an ambitious plan of expanding, opening at least 20 cafes each year for the next five years in the various parts of the country.The company issues two kinds of share including ordinary shares (par value US$ 1 per share), which are currently traded at US$ 2. 50 per share and preference shares , which are currently traded at US$ 52 per share in Australia Stock Exchange. Its corporate tax rate is 25% at present but is expected to go down. With strong earnings growth projected at a constant 15% per annum in the future, Xpresso Delight Limited is expected to pay out US$ 0. 30 per share as ordinary dividend in the next financial year while a constant preference dividend is US$ 5 per share per year.The average flotation cost for the new issue of ordinary shares and preference shares are 17% and 10% of the gross proceeds respectively. For new issue of ordinary shares and preference shares, Xpresso Delight Limiteds issue price will be set at their respective current market price as traded in the Australia Stock Exchange. Xpresso Delight Limiteds before-tax cost of debt is 15%. 4. MAIN BODY 1. Available various sources of finance In the case of Xpresso Limited, as a large company with stable profit growth looking for capital to expand, it is only necessary for long-term financing to be taken into account.Therefore, there are two principal sources of finance available to Xpresso Limited including debt and equity financing. 4. 1. 1. Debt financing In regards to debt financing, the simplest heart is borrowing money on credit with a promise to repay the amount borrowed, plus interest18. There are many types of debt financing, including borrowing from banks in terms of loans or borrowing from investors in terms of debentures, bonds 4. 4. 1. 1. 1. Loans A loan is a financial transaction in which one party the lender agrees to give some other party the borrower an amount of money which must be paid back in full16.With a good finance profile and the support of Vietnam government pro-business policies, it is easier for Xpresso Limited to borrow from commercial banks such as Vietcombank, VietinBank and so on. For example, the supportive interest rate of loans in Vietnam at present is fluctuating between 5 and 6 percent per year14, therefore if Xpresso Limited. b orrows US$ 10,000, the interest it has to pay back will be between US$ 500 and US$ 600. 4. 1. 1. 2. Debentures It is a channel for Xpresso to mobilize capital from investors setting out the terms of loans, backed by its reputation but not collateral12.Investors can be individuals, Vietnam and foreign financial institutions such as VinaCapital, BankInvest and so on and even Vietnam commercial banks are the main investors in organizational debentures. Because of its high standing in the market, investors and other creditors are willing to purchase once Xpresso Limited issues debentures. As in the Vietnam present market , the common interest rate of debentures issued by enterprises is 12. 5 percent per year11, if Xpresso issues debentures of US$ 10 million for 5 years, it has to pay investors the total interest of US$ 6. 5 million. 4. 1. 1. 3. Bonds Bonds are large debts which are usually paid off over a period of 10 to 35 years1. Simply explaining, in bond financing, Xpresso mobilizes capital from investors instead of banks by selling bonds to them with a promise to pay back with interest, according to specified schedules8. As an example, if Xpresso issues bonds at an interest rate of 6%, the interest over 20 years would be about US$ 0. 73 for each dollar borrowed. 4. 1. 2. Equity financingIn terms of equity financing, equity capital generally is composed of funds that are raised by Xpresso in exchange for an ownership interest in the company17. Since it is owners equity, the company does not have to worry about any liability to repay interest or loans for other parties. There are two major sources of equity financing including issued share capital and retained profit & other reserves12. 4. 1. 2. 1. Issued share capital Issued share capital is capital that is subscribed by shareholders when they purchase shares Xpresso Limited issues, including common and preference shares4.Common shares are shares issued to the general public in the stock market, while preferen ce shares are shares issued to some special people (for example, banks or specific institutions)2. 4. 1. 2. 2. Retained profit & other reserves Retained profit is simply profit that has been kept within Xpresso Limited rather than paid out to shareholders as dividends 2. 2. Assessment of the implications of sources of finance to Xpresso Delight Limited related to risk, legal, financial and dilution of control and bankruptcy 4. 2. 1. Debt financingAs being categorized in debt financing, those various types including loans, debentures and bonds have some implications to Xpresso in similarity, which are going to be discussed below. There are many advantages of Xpresso Limited for using debt financing. There is no dilution of control since the creditors have no authority in running the company but just involve in the money they invest and they usually do not participate in the superior earnings of the company either as the cost of debts is limited 13. The most important advantage is tax relief on interest as it is considered one kind of expenses3.For example, if Xpresso Limited borrows US$ 10,000 at the interest rate of 5%, it will have to pay the interest of US$ 500 but will be reduced US$ 500 in the tax-incurred income. Whats more, in time of inflation, debts may be paid back with cheaper pesos13 since the money becomes worth less. To the existing shareholders, one advantage is when Xpresso Limited unfortunately goes broke, they may lose their investment but other personal possessions are safe 2. However, using debt financing also has disadvantages. Obviously, debts add risk to the company12.There is a risk of not having enough money to pay by the maturity date or if the earnings of Xpresso Limited fluctuate 12 either of which easily makes the company become bankruptcy. To add more, the legal of debt financing in Vietnam is relatively complicated 2, and certain managerial prerogatives are usually given up in the bonds indenture contract (for example, specific ra tios must be kept above a certain level during the term of the loan)13. Besides, debentures and bonds also have their own characteristics. 4. 2. 1. 1. DebenturesOne advantage of using debenture financing is that Xpresso Limited does not have to give collateral9. However, it also has disadvantages as it must compete with government loan stocks (gilts), what are the dominant type of debentures in Vietnam market, so the company must generally offer a higher rate of interest than the one on gilts to attract investors4. The legal issue of debentures that Xpresso Limited has to concern is that if a bond defaults, investors are entitled to the liquidation proceeds of property bought with the money they invest (by purchasing debentures)5. . 2. 1. 2. Bonds Bonds have fixed interest and are issued for long-term1. One advantage of using bond is that substantial flexibility in the financial structure is enhanced by debt through the inclusion of call provisions in the bond indenture13. In case o f financial distress, bondholders have greater claims of the issuers income than shareholders6. 4. 2. 2. Equity financing 4. 2. 2. 1. Issued shares The legal aspect involved is that shareholders are also owners of the company4.Therefore, the business ownership is diluted and it is possible to lose the control of the business for investors. However, there is also an advantage that there is large potential membership to provide capital and to share risks of loss, bankruptcy and so on. There is a part of profit of the company distributed to shareholders as dividends. One significant advantage of using issued share capital is that Xpresso may withhold the dividend if profits are insufficient. One disadvantage is that cash dividends are not tax deductible. 13) Besides, each type of shares also has its own characteristics. 4. 2. 2. 1. 1. Common shares The advantages of using common shares are that common dividend is based on profits when so that Xpresso Limited is free from worrying about not having enough money to pay there is no fixed maturity date for repayment of the capital and the sale of common shares is frequently more attractive to investors than debts as its value grows with the success of the firm11. However, there are disadvantages as well. Shareholders ave right to vote, therefore the shareholders control and share in earnings are usually diluted13. If Xpresso decides to issue common shares, the stake of CEO (51% at present) will be reduced as the number of shares increases. In terms of finance, issuance of common shares requires higher underwriting costs and the average cost of capital may increase above the optimal level when too much equity is issued13. 4. 2. 2. 1. 2. Preference shares Legally, like common share, preference shares represent a part of ownership or equity of Xpresso Limited4.Whats more, in case of financial distress, claims of preference shareholders must be satisfied before common shareholders receive anything13. There is no default r isk since non-payment of dividends does not necessarily mean bankruptcy. Preference dividend is fixed so that the company can plan to pay. Preference shareholders have no voting rights except in case of financial distress, which means there is no dilution of control. Call features and provision of sinking may be included so Xpresso may replace the issue if interest rates decline.There is one disadvantage that preference shares involve cumulative feature, which means in case Xpresso Limited does not have money to pay dividends in a particular year, the dividend keeps getting added to the next years dividend until the it is able to pay. (13) 4. 2. 2. 2. Retained profit There are advantages to using retained profit as a form of finance due to the absence of brokerage costs (for example, merchant banks fees), its simplicity and flexibility, and all gains from investment will still ultimately belong to existing shareholders13.Besides, there are disadvantages as shareholders expectation o f dividends may present a problem or insufficient earnings may be available4. 4. 3. Selection of appropriate sources of finance for a business project & assessment and comparison for various cost involved for each sources 4. 3. 1. Appropriate sources of finance As discussed above, it is proposed that Xpresso Delight Limited should use equity financing in forms of retained profit, issued share capital and debt financing in forms of loans in the capital structure.The main source that should be included is retained earning since it is the solidest source and has the least risk to the firm3. Issued shares and loans are the next choices as they bring many opportunities and a relatively reasonable number of risks as well as liabilities. 4. 3. 2. Costs of sources 4. 3. 2. 1. Retained profit Costs of retained earnings include fixed expenses such as wages, rent, materials, electricity and so on tax cost dividends (dividends are a cost of retained earnings as well as a cost of share capital) certain costs if invested in the short term as not needed immediately and also opportunity costs4. . 3. 2. 2. Issued shares Costs of the issued share capital include flotation costs, dividends (cash dividend and scrip dividends- dividends in the form of new shares) cost of providing shareholders or owners with information about the performance of the business such as the cost of glossy financial reports, Annual General Meetings, audit fees and the administrative costs of company with legal and Stock Exchange requirements for disclosure of information to shareholders and also certain costs associated with investing them if not needed immediately4. 4. 3. 2. 3. LoansLoans have interest as the main cost. The rate of interest may either be fixed or variable but in the case of Xpresso Limited it is fixed. There are also other costs including an initial arrangement fee to cover lenders administrative costs on setting up the loan (checking references, setting up data on a computer system an d so on) factors charge commission for advancing funds non-financial costs involved in the relationship between the company and creditors (for example, Xpresso will be required to provide the creditor with regular information about the performance of the business)4.That kind of non-financial cost may create the uncomfortable feeling of being watched for the owner. Opportunity cost is also included in this case as well. For instance, instead of paying interest of US$ 10,000 a year the business could do something else with that US$ 10,000 that might help generate income. 4. 3. 3. Options of capital structure There are three alternative capital structures that could be taken into account. Based on the comparison between their advantages and disadvantages, the most appropriate structure would be chosen. . 3. 3. 1. First structure For the first structure, it is to use 50% debt financing and 50% equity including 80% common share and 20% preference shares. That means US$ 15 million of debt s, and US$ 15 million of equity including US$ 12 million of common shares and US$ 3 million of preference shares. The costs of sources are Rf = US$ 0. 167 million Rc = US$ 1. 84 million Rd = US$ 1. 69 million The total cost is 0. 167 + 1. 84 + 1. 69 = 3. 697 (US$ million) 4. 3. 3. 2. Second structureThe second structure is to use 25% debt financing and 75% equity financing including 80% common shares and 20% preference shares. That means US$ 7. 5 million of debts, US$ 22. 5 million of equity including US$ 18 million of common shares and US$ 4. 5 million of preference shares. The costs of sources are Rf = US$ 0. 25 million Rc = US$ 2. 81 million Rd = US$ 0. 84 million The total cost is 0. 25 + 2. 81 + 0. 84 = 3. 9 (US$ million) 4. 3. 3. 3. Third structure The third structure includes 10% debt financing and 90% equity financing including 80% common shares and 20% preference shares.That means US$ 3 million of debts, and US$ 27 million of equity including US$ 21. 6 million of common sha res and US$ 5. 4 million of preference shares. The costs of sources are Rf = US$ 0. 3 million Rc= US$ 3. 32 million Rd = US$ 0. 34 million The total cost is 0. 3 + 3. 32 + 0. 34 = 3. 96 (US$ million) As comparing the costs and the advantages & disadvantages of the three structures, it is to be said that the second structure is the best capital structure to apply for Xpresso Limited.Because although it does not has the lowest cost, the proportions of sources of finance included are the most appropriate option as the percentage of debts used (25%) is not too high for adding risks to the company but also ensures for the financial leverage (the tax relief) to be used. In addition, the cost of finance in this structure is still relatively low. 4. 4. The financial planning 4. 4. 1. Definition In general, financial planning is the process of developing strategies to help you manage your financial affairs so you can build wealth, enjoy life and achieve financial security5. . 4. 2. Importanc e for Xpresso Limited Financial planning involves achieving a balance between the requirements to minimize the risk of not having cash to pay creditors and the requirements to maximize the earnings made by using assets4. It plays a very important role in helping Xpresso co-ordinate and organize the internal system, set up detailed plans for using resources, as well as for paying debts and liabilities, develop strategies, and finally prepare for any potential incidents in the future7. For Xpresso, every transaction has to be well-planned to run the business efficiently. . 4. 3. Shortage & surplus of capital Capital surplus- the amounts of directly contributed equity capital in excess of the par value13 has a large impact on Xpresso Limited as it can be used to distribute as bonus dividends to shareholders, to reinvest as owners equity and it also helps to reduce the cost of capital mobilizing9. It helps gain more prestige for Xpresso but also gives more pressure on the management as they have a duty to use it effectively. Capital is one factor of production, therefore its shortage makes difficulties for Xpresso to operate and develop efficiently4.Even it can lead to bankruptcy if capital shortage is too large. 5. CONCLUSION It can be said that each and every source of finance has both advantages and disadvantages. The aim is to make use of the advantages and also to avoid the disadvantages of all sources. The best capital structure is to combine the appropriate sources to make the best use for the company. To conclude, the capital structure proposed is to use 25% debt financing and 75% equity financing including 80% common shares and 20% preference shares in estimated US$ 30 million of capital.The cost of finance is US$ 3. 9 million. The structure has a relatively cost of finance and also ensures to make use of all advantages as well as minimizes all disadvantages of sources of finance used for expansion. As preparing a detailed and well-organized financial pl anning, there is a high rate of success for the expansion and other further developments of Xpresso Delight Limited Company. Appendix 1. Formula of cost debts + Before-tax cost Rdt = debts x 15% + After-tax cost Rd = Rdt x (1 t) Rd After-tax cost Rdt Before-tax cost t Corporate tax rate (t = 25%) . Formula of cost of issuing shares 1. Cost of issuing common shares Rc = Dc / Pc (1 ec) + g Dc dividend per share (Dc= US$ 0. 3) Pc value per share (Pc= US$ 1) ec flotation cost for ordinary share (ec= 17%) g rate of earnings growth (g= 15%) 2. Cost of issuing preference shares Rf = Df / Pf (1 ef) Df dividend per share (Df = US$ 5) Pf value per share (Pf = US$ 1) ef flotation cost for preference (ef= 10%) Reference 1. City & County of San Francisco (2002) Bond Financing Basics. San Francisco Controllers office 2.Communist party of Vietnam (2005) Procedure of borrowing from Vietnam bank for agriculture and rural development online. Updated 20 June 2005 accessed 29 November 2009. Available from http//www. cpv. org. vn/cpv/Modules/News/NewsDetail. aspx? co_id=30592&cn_id=223635 3. Edexcel HNC&HND business (2004) Business environment, London BPP professional Education 4. Edexcel HNC&HND business (2004) Managing financial resources and decisions, London BPP professional Education 5. Financial News (1996) online. eFinancialNews Ltd cited 26 October 2009 .Available from Internet http//www. efinancialnews. com/&sc=TWTAM000GS 6. Financial planning defined (2005) online Financial Planning Association cited 25 October 2009. Available from Internet http//www. fpa. asn. au/FPA_Content. aspx? Doc_id=1056 7. Hong, P. (2007) Capital surplus- to distribute or not?. Saga online. Accession No. 362/GP-BC, 10 October, cited 1 December 2009. Available from http//www. saga. vn/Luatkinhdoanh/Luattrongnuoc/6794. saga 8. Hong, S. (2009) Organizational debentures attractive to foreign