REPORT there is a change in the company’s

REPORT ON BENITEZ PLC
FINANCIAL PERFOR

To conclude I defiantly think GNCC Capital should
reduce their weighted average cost by utilising more debt financing as it is
cheaper and will allow GNCC Capital to obtain more ownership of the company
however they have to beware of not becoming too over geared as it can create
risk. With saying that I don’t completely think GNCC Capital should stop using
equity financing, just reduce the amount as it could potentially create lower
risk of GNCC Capital becoming bankrupt.

Alternatively, if GNCC Capital decide they prefer to
use equity capital over debt financing I think the company should firstly try
to increase their market share value by improving managerial decisions such as
profit maximisation and sales maximisation, as a higher market share price will
potentially lower their cost of equity capital and attract more and cheaper
investors due to a lower risk associated with the firm’s operations.

However, too much debt financing can make the company over
geared and increase leverage creating some risk for GNCC Capital, because if there
is a change in the company’s financial position for example the company’s
profit somehow reduces or interest rates suddenly increase, the company is
obliged to follow repayment schedules or could face bankruptcy. Regardless of
the company’s financial position lenders will not change interest rates to
compensate which could potentially end a whole project

Additionally, debt financing has the benefit of
allowing the GNCC to preserve full ownership without any outside interference of
managerial decisions made by GNCC which will reduce conflict within the firm.
It also means they don’t have to share as much of their profit with
shareholders as lenders receive only the sum of interest agreed on, unlike
equity capital with profits being shared.

Discovering that information has led me to the
conclusion that for GNCC Capital to reduce their weighted average cost of capital
they could should issue more debt financing and reduce the amount of equity
capital they use. The main reason why I suggest GNCC use more debt financing is
because it is considerably cheaper than equity capital it also may help the
firm recollect more profit within the company as with debt financing GNCC Capital’s
interest payments are tax deductible reducing the firms net duty unlike equity
capital when dividends is paid out of profit after tax, beneficially fixed
monthly or annual payments make it easier for the firm to budget and plan their
finances.

According to Arnold (2012 p 773) “financing a business
through borrowing is cheaper than using equity capital. This if first because
lenders require a lower rate of return than ordinary shareholders” I found this
to be certainly true as when calculating the capital structure and the weighted
average cost of capital for both GNCC Capital and Magnet Financial services as
show in table 1 and 2, I found the cheapest source of capital for both firms
was bank loan, (debt capital) costing only 7.5% which was cheaper than
preference shares and considerably than equity capital.

I think GNCC Capital should definitely aim at reducing
their weighted average cost of capital and opting for a cheaper source of
capital as it has benefits such as attracting investors as it increases the
value and reputation of firm and furthermore will widen their business
opportunities by allowing them to accept low return projects and still increase
value.      

CHEAPER SOURCES OF FINANCE
AND IDEAS ON REDUCING WEIGHTED AVERAGE COST OF CAPITAL

 

 

 

 To conclude, after
much analysing it is almost certain that GNCC Capital, concerns for capital is
correct and should immediately aim at changing their capital structure to
reduce their weighted average cost of capital. The negatives of utilising
equity capital most defiantly outweigh the positive, such as issues like
conflict with in the firm due to outside forces influencing decisions also the
higher cost of burden and potential reduction in profits for GNCC Capital.

However, having too much equity capital may not also
be a completely bad idea for GNCC Capital, as a high amount of use of equity
capital ensures a lower risk of bankruptcy for GNCC Capital. This is because
dividends payments can be deferred if the firm is having some financial
problems and any form of cash flow can be directed into improving the firm’s
operation to relieve themselves from a financial crisis.

Your worries of Magnet financial services attracting
cheaper sources of finance is very accurate. This is due to Company Capital’s
weighted average cost of capital being 1.34% higher than their competitors
Magnet financial services meaning there is a higher risk associated with the
firm’s operation which may be deemed unattractive to investors and lead them
more towards their competitors. Moreover, Magnet Financial Services may be
attracting cheaper sources of finance because they have a higher market share
price by £15 in comparison to GNCC Capital, meaning a lower risk is associated
with Magnet Financial Services operation meaning the required rate of return
will be significantly lower making there cost of equity capital cheaper and
reducing the companies weighted average cost of capital.

Additionally, an important disadvantage or equity
financing is the share in profit. according  to Modigliani and Miller (1958 p 263) “In
particular, the use of debt rather than equity funds to finance a given venture
may well in- crease the expected return to the owners, but only at the cost of
in- creased dispersion of the outcomes.” Which supports my theory that  if the company has a great turnover and takes
off they will have to share a proportion of the earnings with its shareholders
which could potentially lead to the dispersal of profits over the long term
exceeding what GNCC Capital could have repaid on a loan.                                               

Another flaw of GNCC Capital using equity capital as a
form or capital financing is the expected pressure applied by shareholders. As
mentioned before because of the uncertainty and risk investors hold they may
apply pressure on the firm on achieving a high rate of return on there
investment which may cause conflict with management as it could affect GNCC
Capital’s goals and plan.

I think the main cause of GNCC Capital’s high weighted
average cost of capital is there flawed capital structure, they are simply
using way too much equity capital. Equity capital is money that is invested
into the business by investors in conversion of a share of the company with an
expected rate of return normally set by investors. If you look in table 1, we
can see that equity capital (earning shares and retained earnings) is a
staggering 64.7% proportion of GNCC capital structure and cost the highest
amount (14.8%) in comparison to the other sources of capital in the structure
such as bank loan (7.5%) and preference shares (7.62%). The reason why equity
capital is typically more expensive is because its holds a higher risk for
shareholder, the definite return of the investment is uncertain for investors
in comparison to a fixed obligated amount earned by debt financers if GNCC
Capital was to go bankrupt equity shareholders would be the last to get their
money back with debt lenders and preference shares being a priority. Furthermore,
financing through equity also necessitates other expenditures such as
underwriting fees, brokerage and a merchant banker which just adds to GNCC
Capital’s expenditures.

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