TASK 1(i) The three main sources of finance that are potentially available to petrula are: 1.

Secure a loan from the bank. 2. Retained profit 3. Make an issue of debenture Features of loan from bank 1. Time of maturity: Time of maturity describes the length of the loan contract . 2. Repayment schedule: payment may be required at the end of the contract or at set intervals, usually on a monthly or semi annual basis. 3. Interest is the cost of borrowing money from the interest rate charge. 4. Security: Assets pledged as security against loan are known as collateral. The cost petrular would potentially bear is that,the interest rate can be quite high and the amount of bank funding for which a company qualifies its offer is not sufficient to completely meet its needs Advantages of bank loan Tax and financial planning The interest of companies bank loan is tax deductible. In addition, especial with fixed rate loan, in which the interest rate does not change during the course of a loan, loan servicing remain the same throughout the life of the loan. This makes it easy for the companies to budget and plan for monthly loan payment even if the loan is an adjustable rate loan, companies owners can use a simple speed sheet to complete future payment in the event of a change in rate. Disadvantage of bank loan They are very difficult to obtain unless the company has a substantial track record or valuable collateral. Advantages of retained earnings 1. Project and Expansion The main aim of retained earnings is for company to have financial resources to reinvest in their operations, creating growth. Retained earnings fund several projects such as research and development, facilities construction, renovation and expansion. Disadvantages of retained earnings When companies suffer losses, the amounts are subtracted from the retained earning carried from previous year. If losses finally over take retained earnings, this amount to the balances becoming negative, having negative balances can lead to serious problem such as bankruptcy. FEATURES Retained earnings represent the dividend policy of a company because they reflect a decision of a company to either reinvest the profit or to distribute profit. Retained earnings are affected by the nature of industry and the age of company. Advantage of debenture 1. Control of company is not surrounded to debenture holder because they do not have any voting right. 2. Prevention can be redeemed when company has surplus fund 3. Trading an equity is possible as debenture holder get lower rate returns from earning in the company.

4. Interest on debenture is allowable expenditure under income tax act, hence incident of tax on the company is decreased. Disadvantages of debenture 1 Cost of rising capital through debenture is high from high stamps duty. 2 Common people cannot buy debenture as they are of high denomination. FEATURE 1 The risk on the part of the debenture holder is very less. 2 The debenture holders of company are the creditor of the company and not the owners of the company. 3 Debentures are generally secured. 4 Debenture holder does not carry any voting right. TASK 1(ii) I will recommend Petrula Company to use bank loan to finance the South America investment.

TASK 2(i)
The impact, the financial decision would have upon financial statement in the proposed 10m investment is that here, equity will be equal to the proposed company liabilities and as such investors will want to analysed the financial ratio of the firm. This depend on the stock price of the company because most investor look at the financial statement as very important when making investment decisions. If the information as in appendix 1 and 2 is not flattering, it may negatively impact the ability of the company to borrow money. Lender usually only want to invest in companies that have good financial numbers. TASKS 2(ii) Formula for weighted average cost of capital: The cost of capital is the average of the cost of each source, weighted by its proportion of the total capital its represent. Hence, it is also referred to as the weighted average cost of capital. The formula is WACC = cost of equity x proportion of equity in capital structure + cost of debt x proportion of debt in capital structure.
TASKS 3 (1) Payback period and net present value. Period Cash flow (000) 0 1 2 3 4 5 10,000 8,250 13,410 14,980 18,590 17,850 Cash out flow (000) 2,700 5,710 6,280 7,890 8,230 Net cash flow (000) 10,000 5550 7,700 8,700 10,700 9,620

Period

Net cash flow

Discount factor

Present value

(000) 0 1 2 3 4 5 10,000 5,550 7,700 8,700 10,700 9,620

5% 0.9524 0.9070 0.8638 0.8227 0.7835

(000) (10,000) 5285.82 6983.9 7515.06 8802.89 7537.27

Payback period is = 10,000,000 PV for year 1 + PV for year 2 10,000 - (5285.82 + 6983.9) 10,000 12269.72 = 2269.72 This figure, is less than the income for the third year which is 7515.06 Hence, the pay back period is in two years and some months time. To get the actual number of months, we would apply this: Balance of the initial investment Present value of the completion year. = 2269.72 x 12months = 3.62 months 7515.06 1

. 62 x 30days =18 days 100 1

Pay back period = 2years + 3months +18days. Net Present value = 36124.94 10,000(million) NPV = 26124.94(million)

TASKS 3ii Advice Since Petrula company project NPV is 26124.94 is greater than zero, acceptance should be recommended and for the payback period, the company has a shorter discounted payback period. Hence it should be accepted. They should embark or invest more.

TASKS 3iii

1 Unit cost : The relationship of resources consumed to output produced,a unit cost is the cost of producing one unit of output or providing one unit of service. here, unit cost are determined by dividing the total cost of inputs use to produce outputs by the total quantity of unit of output produced. 2 The following should be taken by Petrula when setting price for their output. a-Develop market strategy and marketing mix, before the product is developed, the marketing strategy when formulated, target market selection and product positioning. Marketing mix elements, pricing will depend on other product distribution and promotion decision. b-Estimate the demand curve: Because the is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand curve for the product. c- Calculate cost: If the firm has decided to launch the product, There should be at least a basic understanding of the cost involved otherwise, there might be no profit to be made. The unit cost of the product set the lower limit of what the firm might charge, will determine the profit margin at higher price. d- Pricing objective: The firm pricing objective must be identified in order to determine the optimal pricing. e- Determining pricing: To set the specific price level that achieves their pricing objectives, managers may use several pricing methods ,and some of these include. Cost-plus pricing, target return pricing, and value based pricing e.t.c f-Environmental factor: Pricing must takes into account the competitive and legal environment in which the company operates. The firm must consider the implication of its pricing on the pricing decision of competitors. Selected Modem: E173u-2 Phone IMEI: 867749012356576 Calculating Codes... **************************************** UNLOCK CODE : 52718154 FLASH CODE : 57673155 **************************************** Codes Calculated OK... Done.