Financing and Expansion

Student’s Name

Institution

1.I have been running a hair salon business which is now successful, and my focus is to buy a competitor (privately owned hair salon) as part of expansion plans for my business. There are various business valuation methods that one can use to estimate the value of a business in terms of the present value and the business economic future potential. In calculating the present values, we look at all aspects of the business such as capital structure, market value, future earnings prospects and even the management of the company. All these are important to potential investors like me in making the right investment decisions. The methods of valuation are;

( i) Discounted Cash Flow Method

(ii) Market Valuation

(iii) Multiples Method

(iv) Comparable Transaction Method

Discounted Cash Flow Method

Under this method there are two approaches that can be used namely; Adjusted Present Value (APV) and Weighted Average Cost of Capital (WACC)

For example, assuming that the competitor is financed fully by equity then the appropriate valuation technique that I will use is the net present value (NPV) method.

For instance, if the competitor streams of cash flows say for period 0,1, 2, &3 are; $(20000 ) $10000, $8000, $15000 respectively and compounding interest rate is 10%. Then, its net present value would be determined as follows:

( FCF0/1+rd)0+ (FCF1/1+rd)1+ (FCF2/1+rd) 2+ (FCF3/1+rd)3=NPV

(20000)/1.10+ 10000/1.11+8000/1.12+15000/1.13= $6,972.2

Competitor NPV= $ 6972.2

The sum of all Present Value of cash flow is equal $6972.2, which is greater than zero hence the project is profitable and should be considered for purchase.

Based on the assumptions above, the competitor’s net worth would be $6972. It can, therefore, be assumed that to purchase this hair salon business I need to invest an amount not less than or equivalent to $6972.2 for my planned business expansion.

2. Some of the financial tools that I can use in this case may include a balance sheet, income statement, statement of cash flow, and financial leverage ratios such as debt ratio and debt-equity ratio.

a) Statement of Financial Position

I would need critically to analyze my business balance sheet in order to know what I currently own and owes, as well as the amount invested by other shareholders in my salon business. This will enable me to know my business net worth as at the time of purchase; therefore, it will indicate to me whether I can purchase the competitor through cash or borrowing.

b) Income Statement

The income statement of a company reveals a lot about its revenue and expenses during a given period. This information about the competitor’s performance will help me project the growth of my salon, the expected market share, and the overall profitability of my business after the competitor’s purchase, therefore, I will be able to know my affordability level to buy the company.

c) Financial leverage ratios

These will provide me with the information on my capabilities in meeting the long term debt payments without becoming insolvent or spending more than the business I can raise in revenue.

A debt ratio of less than 1 will show that my business has more assets than debt, while a debt ratio of more than 1, indicate that the business has more debts than asset, therefore, it will not be wise to purchase it if the latter is true.

d) Cash Flow Statement

As an analytical tool, statement of cash flow is very useful in determining the viability of a company to pay its long-term debts as it shows the liquidity and solvency of a firm.

3. Debt Market- also known as bond market

In this market, business can rely on borrowed funds to finance their investments plans for future growth, e.g. to buy a competitor, it can happen through the following ways:

i)Issue corporate bonds to public

Under this option, my company can decide to issue corporate bond to the public investors. In order raise the additional amount in debt though it will require me to make regular interest payments to the bondholders, until the maturity date upon which I will be obligated to pay back the full amount borrowed.

ii)Notes Payable

This is a written promissory note, under this agreement I can decide to borrow the $ 100 million from a willing lender with a promise to refund the full amount including the agreeable interest over a given period.

iii)Securitization through Asset Backed Securities

Under this alternative, my company can enter a contractual agreement with a competitor by issuing them with asset backed securities such as home equity loans, credit cards and auto loans to finance the $ 100 million deficit.

iv)Acquire bank loan

Another way that I can use to fund the deficit is through taking a bank loan worth $ 100 million and repays the amount plus interest over an agreed period.

Recommendation

Under this market the best alternative that I would recommend to use is to issue corporate bond because:

a)It does not dilute the value of the existing shareholders

b)Bonds offer a way of stabilizing company finances through having debts on fixed-rate interest.

c)It will enable my business to retain more cash since the bond’s redemption date can take many years.

4. Equity Market- this is a market where equity instruments are traded. Options include.

(ii) Issuance of Preference shares that are a special class of shares whose features and characteristics are not possessed by common stock.

(iii) To issue ordinary shares worth $ 100 million to the public or as an offer to the competitor company.

Recommendation

As a result of my analysis and further investigations, the best alternative here is to finance the deficit by issuing the ordinary shares worth ($100 million) to the public. Offering the competitor shares will mean that the competitor will claim part of ownership in my business and may want to have a position such as that of director, so as to have impact on the decision making process of my business which may not be a better decision.

5. Due to many challenges accompanying the issuance of corporate bonds such as regular interest payments determine whether the business make a profit or loss. A potential decline in business share value whenever there is a reduction in profits, having to fulfill various listing regulation in order to improve the tradability of the bond in the stock market also plays a paramount role. Then, the best alternative that I will use to raise this funding is by issuing of new shares to the potential public investors, through the approval of existing shareholders. By doing this my business will be able to raise enough funds for the expansion plan, attracts new investors who will work hard to ensure that the business become profitable so as to get higher returns for their investment in the form of dividends.