Scenario:The board of Pencoapproved your recommendations and decided to purchase stock in the two organisations you recommended. In fact, based on your recommendations, they decided to invest more than anticipated. The previous budget was £2,000,000 but the board wants to invest £1,000,000 in each of the two organisations you recommended which means that an extra £1,000,000 is required.Instructions:Write a short report containing:▪An introduction discussing the need for short term working capital and long–term funds▪A main body comparing the sources of funding, including their pros and cons▪A justified recommendation of your choices of funding for the £1,000,000 using a range of criteria related to cost and risk.Submission and delivery:▪1x report (circa 1500 words)Answer Plan1.Introduction to Working Capital–Define working capital and its aspects(50 words)–Need for Short Term Working Capital(50–75words)–Need for Long–Term Fund(50 –75words)2.Sources of FundingShort Term–Commercial Paper, Pros & Cons(50 words)–Banker’s acceptance(50 words)–Line of credit / Revolving credit agreement(100 words)–Inventory /receivable backed loan(100 words)Long Term–Initial Public Offering (IPO)/ Secondary offering / Rights Issue(150 words)–Term Loan(150 words)–Venture Capitalist / Private Equity Transactions(100words)–Bonds / Debentures(150 words)–Private Placement(100 words)–Lease / Hire Purchase(50 words)3.A justified recommendationAppropriate Funding –Term Loan/ Bonds–Based on Cost oDebt finance is cheaper than equity finance;oWhile debt finance is cheaper than equity finance, it places onthe company the obligation to pay out cash in the form of interestoSecurity in needed / Covenants need to be adhered tooNo change in the company ownership controloMaturity period should be in line with term of loan(100 words)–Risk–Total risk is made up of the financial risk and the business risk.oFinancial Risk –Risk of not being able make the repayment of debtsoBusiness Risk –company is diversifying into riskier areas therefore gearing is increasing(100 words–Conclusion(100 words)
