LONG-TERM FINANCING

British Sky Plc and GlaxoSmith plc - Financing



British Sky Plc and GlaxoSmith plc - Financing

The sources of finance available to British Sky PLC and GlaxoSmith plc are following:

Retained Earnings

Share Issuance

Trade Credit

Lease Financing

Merits & De-Merits of Sources of Finance

Retained Earnings

The merits of retained earning as a source of finance are as follows:

(i) Retained earnings is a permanent source of funds available to an organisation;

(ii) It does not involve any explicit cost in the form of interest, dividend or floatation cost;

(iii) As the funds are generated internally, there is a greater degree of operational freedom and flexibility;

(iv) It enhances the capacity of the business to absorb unexpected losses;

(v) It may lead to increase in the market price of the equity shares of a company.

Retained earning as a source of funds has the following limitations:

(i) Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends;

(ii) It is an uncertain source of funds as the profits of business are fluctuating;

(iii) The opportunity cost associated with these funds is not recognised by many firms. This may lead to sub-optimal use of the funds.

Share Issuance

Advantages of company: The advantages of issuing equity shares may be summarized as below:

Long-tern and Permanent Capital: It is a good source of long-term finance. A company is not required to pay-back the equity capital during its life-time and so, it is a permanent sources of capital.

No Fixed Burden: Unlike preference shares, equity shares suppose no fixed burden on the company's resources, because the dividend on these shares are subject to availability of profits and the intention of the board of directors. They may not get the dividend even when company has profits. Thus they provide a cushion of safety against unfavorable development

Credit worthiness: Issuance of equity share capital creates no change on the assets of the company. A company can raise further finance on the security of its fixed assets.

Risk Capital: Equity capital is said to be the risk capital. A company can trade on equity in bad periods on the risk of equity capital.

Dividend Policy: A company may follow an elastic and rational dividend policy and may create huge reserves for its developmental programmes.

More Income: Equity shareholders are the residual claimant of the profits after meeting all the fixed commitments. The company may add to the profits by trading on equity. Thus equity capital may get dividend at high in boom period.

Right to Participate in the Control and Management: Equity shareholders have voting rights and elect competent persons as directors to control and manage the affairs of the company.

Capital profits: The market value of equity shares fluctuates directly with the profits of the company and their real value based on the net worth of the assets of the company. an appreciation in the net worth of the company's assets will increase the market value of equity shares. It brings capital appreciation in their investments.

An Attraction of Persons having Limited Income: Equity shares are mostly of lower denomination and persons of limited recourses can ...