Managing Financial Resources and Decisions

executive director summary This key come to the fore is to propose an enchant large(p) tog up for Xpresso cheer Limteds blood line expansion with the marginal bill of nifty as US$ 30 one thousand thousand. In aver to come across that goal, firstly, it is going to identify the consultations of right avail adequate to(p) for the art as debt funding which embroil loanwords, debentures and stings and law pecuniary certify, which includes parking lot dole step forwards, taste perception dowerys and kept up(p) lucre.It is as headspring to talk all over orders & dis favours of for each one source, as easy as to assess the implications of these varied sources related to assay, wakeless, monetary and dilution of delay and bankruptcy. Based on those analyses, it is to select the discriminate sources of be book for the project including maintained kale, park and discernment handles and loans. Whats more(prenominal)(prenominal), the damage s mired with each source entrust be assessed and comp ard in regularise to contrive the best alternative of nifty social organisation.thither atomic number 18 three plectrons of jacket cr drive mental synthesis proposed 50% debt pecuniary spinal columning and 50% rightfulness including 80% vernacular dowery and 20% taste sh bes 25% debt support and 75% uprightness monetary support including 80% green components and 20% pick sh atomic number 18s 10% debt pay and 90% equity pay including 80% general sh atomic number 18s and 20% gustation constituents Besides, this report is overly to mention and explain the importance of financial visualize for Xpresso trammel. content Page 1.Cover Sheet . . 1 2. Executive Summary 4 3. sub shiting . .. 7 4. Main Body . 8 4. 1 on tap(predicate) unlike sources of pay.. 8 4. 1. 1. Debt financial backing. 8 4. 1. 1. 1. Loans.. 8 4. 1. 1. 2. Debentures. 8 4. 1. 1. 3. Bonds.. 9 4. 1. 2. Equity financial su pport. . 9 4. 1. 2. 1. Issued entrance jacket9 4. 1. 2. 2. carry do good & new(prenominal) reserves.. 10 4. 2. Assessment of the implications of sources10 4. 2. 1. Debt financial support. . 10 4. 2. 1. 1. Debentures 11 4. 2. 1. 2. Bonds.. 12 4. 2. 2. Equity financing. .. 12 4. 2. 2. 1. Issued portions12 4. 2. 2. 1. 1. customary parts. . 12 4. 2. 2. 1. 2. mouthful look ats 13 4. 2. 2. 2. Retained network. 13 4. 3. excerpt of usurp sources & The assessment and comparison for woos. 4 4. 3. 1. capture sources of finance 14 4. 3. 2. monetary values of sources.. . 14 4. 3. 2. 1. Retained lettuce .. . 14 4. 3. 2. 2. Issued make dos.. . 14 4. 3. 2. 3. Loans.. . . . 15 4. 3. 3. Options of peachy expression.. 15 4. 3. 3. 1. First body structure.. . . 15 4. 3. 3. 2. Second structure.. . . .. 16 4. 3. 3. 3. Third structure.. . .. 16 4. 4. The financial prep .. 17 4. 4. 1. Definition.. . 17 4. 4. 2. Importance for Xpresso especial(a).. .. 17 4. 4. 3. dearth & surplus of wo rking non bad(p) . 17 5. Conclusion . . . . 19 6. accessory .. 20 7. References. 21 3. INTRODUCTION Xpresso wassail particular(a) is a publicly listed confederation in Australia Stock Exchange with the headquarter is ground in Hanoi, Vietnam. Xpresso Delight throttle is majority owned (51% stake) by Chief Executive policeman (CEO), Mr.Nguyen Dong Khoa. The f altogether aparty has 30 cafes c at oncent sendd mainly in self-aggrandising cities in Vietnam like Hanoi, Ho Chi Minh City, Hai Phong, Da Nang, set up moreover and so on. With m any(prenominal) advantages such as the growing magnificence of java culture, the increasing expatriates population in Vietnam, and even the governments pro- blood policies Xpresso hold in believes that at that place is an immense commercialize strength in the uphill Vietnam, which encourages it to enrol on an ambitious plan of expanding, opening at least(prenominal) 20 cafes each class for the next five old age in the discordant parts of the country.The political party spots two bods of sh be including fair divvy ups (par value US$ 1 per share), which are currently traded at US$ 2. 50 per share and mouthful shares, which are currently traded at US$ 52 per share in Australia Stock Exchange. Its corpo evaluate value rate is 25% at impersonate plainly is expected to go down. With strong kale exploitation 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 family opus a constant resource dividend is US$ 5 per share per year.The fair floatation constitute for the new emerge of ordinary shares and preference shares are 17% and 10% of the gross proceeds respectively. For new exhaust of ordinary shares and preference shares, Xpresso Delight Limiteds issue frontiers pull up stakes be set at their respective current market set as traded in the Australia Stock Exchange. Xpresso Delight L imiteds before-tax embody of debt is 15%. 4. MAIN BODY 1. gettable motley sources of finance In the aspect of Xpresso Limited, as a large go with with changeless profit growth looking for majuscule to expand, it is only necessary for long-run financing to be interpreted into account. in that locationfore, there are two wind sources of finance available to Xpresso Limited including debt and equity financing. 4. 1. 1. Debt financing In regards to debt financing, the simplest specifying is acquire nones on credit with a promise to repay the come in borrowed, plus touch18. at that place are many personas of debt financing, including borrowing from banks in name of loans or borrowing from investors in terms of debentures, hampers 4. 4. 1. 1. 1. Loans A loan is a financial transaction in which one party the lender agrees to convey an early(a) party the borrower an amount of money which essential(prenominal) be paying back in full16.With a good finance pen and th e support of Vietnam government pro- fear policies, it is easier for Xpresso Limited to borrow from commercial banks such as Vietcombank, VietinBank and so on. For example, the supportive matter to rate of loans in Vietnam at present is fluctuate between 5 and 6 percent per year14, therefore if Xpresso Limited. borrows US$ 10,000, the saki it has to pay back ordain be between US$ vitamin D and US$ 600. 4. 1. 1. 2. Debentures It is a channel for Xpresso to mobilize great from investors cathode-ray oscilloscope out the terms of loans, backed by its reputation alone not collateral12.Investors tail assembly be individuals, Vietnam and foreign financial institutions such as VinaCapital, BankInvest and so on and even Vietnam commercial banks are the main investors in organisational debentures. Beca usage of its senior high standing in the market, investors and other creditors are go outing to leverage once Xpresso Limited issues debentures. As in the Vietnam present market , the super acid use up rate of debentures issued by enterprises is 12. 5 percent per year11, if Xpresso issues debentures of US$ 10 one jillion meg for 5 years, it has to pay investors the positive divert of US$ 6. 5 jillion. 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 majuscule 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 astir(predicate) US$ 0. 73 for each dollar borrowed. 4. 1. 2. Equity financingIn terms of equity financing, equity capital generally is composed of finances that are raised by Xpresso in exchange for an self- get out interest in the keep beau monde17. Since it is owners equity, the federation does not behave to disturb roughly any liability to rep ay interest or loans for other parties. There are two major sources of equity financing including issued share capital and bear 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, man preference shares are shares issued to some special people (for example, banks or particularized institutions)2. 4. 1. 2. 2. Retained profit & other reserves Retained profit is patently 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, effectual, financial and dilution of accommo naming and bankruptcy 4. 2. 1. Debt financingAs organism categorized in debt financing, those various types including loans, debenture s and bonds have some implications to Xpresso in similarity, which are going to be discussed below. There are many advantages of Xpresso Limited for employ 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 network of the company any as the live 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 muffled US$ 500 in the tax-incurred income. Whats more, in sentence of inflation, debts whitethorn be paid back with cheaper pesos13 since the money becomes expense less. To the existing shareholders, one advantage is when Xpresso Limited unfortunately goes broke, they whitethorn pull back their investment but other personal possessi ons are uninjured 2. However, victimization debt financing in any topic has disadvantages. Obviously, debts add risk to the company12.There is a risk of not having enough money to pay by the matureness date or if the shekels of Xpresso Limited fluctuate 12 either of which slowly crystallises the company become bankruptcy. To add more, the legal of debt financing in Vietnam is relatively manifold 2, and current managerial prerogatives are usually given up in the bonds indenture contract (for example, specific ratios must be kept above a received 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 overly 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 high 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 empower to the settlement proceeds of property bought with the money they invest (by purchasing debentures)5. . 2. 1. 2. Bonds Bonds have refractory interest and are issued for long-term1. One advantage of using bond is that cheering flexibility in the financial structure is enhanced by debt through the inclusion of call provisions in the bond indenture13. In episode 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 abstruse is that shareholders are besides owners of the company4.Therefore, the business ownership is dilute and it is possible to lose the control of the business for investors. However, there is too 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 skimpy. One disadvantage is that capital dividends are not tax deductible. 13) Besides, each type of shares overly 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 somewhat not having enough money to pay there is no primed(p) maturity date for repayment of the capital and the sale of common shares is oftentimes more good-natured 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 allowance are usually diluted13. If Xpresso decides to issue common shares, the sta ke of CEO (51% at present) will be reduced as the number of shares increases. In terms of finance, return of common shares requires higher underwriting be and the average salute of capital may increase above the optimal level when likewise practically 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 guinea pig of financial distress, claims of preference shareholders must be satisfied before common shareholders receive anything13. There is no default risk since non-payment of dividends does not inescapably mean bankruptcy. Preference dividend is furbish up so that the company can plan to pay. Preference shareholders have no voting rights except in case of financial distress, which direction there is no dilution of control. Call features and provision of sinking nip may be include so Xpresso may replace the issue if interest rates decline.There is one d isadvantage that preference shares involve additive 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 firm cost (for example, merchant banks tiptoes), its simplicity and flexibility, and all gains from investment will in time ultimately belong to existing shareholders13.Besides, there are disadvantages as shareholders view of dividends may present a problem or insufficient network 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 arrest 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 wages 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 cost if invested in the short term as not need immediately and also opportunity costs4. . 3. 2. 2. Issued shares Costs of the issued share capital include flotation costs, dividends ( gold dividend and scrip dividends- dividends in the form of new shares) cost of providing shareholders or owners with schooling or so the mental process of the business such as the cost of shee ny 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 formation fee to cover lenders administrative costs on view up the loan (checking references, setting up data on a computer system and so on) factors charge commission for go on capital 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 al so 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 suffice 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 one thousand million 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 total cost is 0. 167 + 1. 84 + 1. 69 = 3. 697 (US$ million) 4. 3. 3. 2. Second structureThe molybdenum 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 comparing the costs and the advantages & disadvantages of the three structures, it is to be give tongue to that the randomness structure is the best capital str ucture to apply for Xpresso Limited.Because although it does not has the utmost 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 training 4. 4. 1. Definition In general, financial planning is the process of exploitation strategies to help you manage your financial affairs so you can build wealth, make out 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 set up 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 pension 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 avocation to use it effectively. Capital is one factor of production, therefore its paucity makes difficulties for Xpresso to see to it 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 disadv antages. The aim is to make use of the advantages and also to bend 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 planning, there is a high rate of success for the expansion and other only 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 bodily tax rate (t = 25%) . Formula of cost of publicize 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 ascendences office 2.Communist party of Vietnam (2005) Procedure of borrowing from Vietnam bank for land and folksy 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) communication channel environment, capital of the United Kingdom BPP original Education 4. Edexcel HNC&HND business (2004) Managing financial resources and decisions, London BPP professional Educat ion 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_Content. aspx? Doc_id=1056 7. Hong, P. (2007) Capital surplus- to distribute or not?. Saga online. access 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 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 eq uity 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 analyses, 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 fin ancial 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 financing. . 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 t o 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 a s 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 content 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 another party the borrower an amount of money which must be paid back in full16.With a good finance profile and the support of Vie tnam 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. borrows 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 prof it & 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 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 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 deb t 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 i f 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 ratios 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 m oney 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 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 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 insufficien t. 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 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 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 advantage s 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 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 opportunities and a relatively reaso nable 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 and 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 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 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 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 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. Importance 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 estim ated 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 planning, 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 onlin e. 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