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Sample Report On

Financial Markets EDF Energy

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Table of Contents
Introduction ..................................................................................................................................... 1

1. Sources of finance ....................................................................................................................... 1

2. Considerations for selecting source of finance ........................................................................... 3

3. Capital structure of the company ................................................................................................ 5

Conclusion ...................................................................................................................................... 7

References ....................................................................................................................................... 8

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List of figures
Figure 1: Capital structure of EDF energy ...................................................................................... 6

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Introduction
Every business unit whether public sector undertaking or private sector unit needs to
make investment from time- to-time. It is essential for organization to acquire funds from valid
and appropriate sources of finances. This in turn ensures availability of funds at reasonable cost
and smooth running of business operations (Jonsson, 2008). The report herewith deals with case
of EDF energy, one of the leading energy suppliers. It describes sources of finance suitable for
the business unit, factors that are taken into consideration for selecting source of finance. Lastly,
it describes manner in which capital structure of business unit affects financing decision. The
report provides an in-depth overview of manner in which finances are acquired efficiently.

1. Sources of finance
The business unit has an access to various financing option through which funds
requirement can be met. List of sources that are available to business unit for acquiring finances
are mentioned and described in brief underneath.
Bank Loans: This is the financing option that enables business unit to acquire funds by
way of easy bank loans available. The source of finance enables to meet business requirement for
both long term and short term (Nogueira, Jorge and Oliver, 2013). It assists in increasing
business capital in the form of debt and carries specific rate of interest. Cost of capital in the
form of interest rates is charged as per the credit worthiness of organization. The alternative is
suitable for business units with low leverage position and high credit worthiness. In addition, the
company should also be capable of making interest payments on regular basis and repayment
after specified duration of time.
Debentures and corporate bonds: The public listed companies have option to increase
leverage in the organization by issuing debentures and bonds. This is a financing option with
high amount of costs in the form of floating cost and interest expenses. The option is suitable for
raising funds for long term and meets requirement of large amount of funds (Bierman and Smidt,
2003). It is the costliest financing option and is suitable in limited circumstances.
Retained earnings: Every business unit irrespective of their size creates reserve and
surplus fund for making utilization within the organization. This funds are saved in the form of

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retained earnings. In order to meet short term business requirement the organization can utilize
certain proportion of retained earnings. The source of finance has no cost associated with it and
is suitable to meet various kinds of business requirements. The retained earnings helps in making
arrangement of funds in cases of uncertainties and short term business requirements (Suto and
et.al., 2007). Being an internal source of finance; it is easily assessable and carries no cost of
capital.

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Issue of equity shares: Equity shares are issued in order to raise proportion of equity by infusing
funds in the form of owners' capital. The business unit can acquire funds by way of equity capital
in order to meet long term requirement. The financing option does not involves payment of
interests on regular basis (Riley, 2012). However, it transfers ownership in hands of shareholders
in the form of voting rights. Cost connected to the financing option is large amount of floating
cost. This cost is written off in future every year proportionately from net income of the business
unit. In case of meeting requirement of significant amount of funds for long term the issue of
equity capital is suitable. It is also appropriate in cases whereby business units need to infuse
more amount of funds in the form of equity capital.
Leasing and Hire purchase: The business unit can also arrange funds externally for
acquisition of plant and machinery through leasing and hire purchase option. The alternatives

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help in acquiring assets that derives benefit for long term. In case of leasing the agreement is
established between lessor and lessee. Lessor is the real owner of assets who allows lessee to use
them in return of certain specific sum of money on monthly or quarterly basis. The amount is
charged in the form of rent that is a sort of interest payment on initial outlay of lessor and value
of depreciation of assets. It is suitable source of financing for plant and machinery that is
required for specific duration of time.
In case of hire purchase the business unit is enable to acquire assets on periodic payment
for cost of assets. This payment is made in the form of installments and includes the cost of
machinery plus respective interest on same. The option helps in acquiring required fixed assets
without involvement of one-time payment of large sum of money. Henceforth, is appropriate for
business unit that is in need of machinery for long term and is not capable of making one time
payment for same.
The organization can raise funds externally by way of debentures, corporate bonds, bank
loans and equity capital. It is the responsibility of management to judge suitability of each
financing option as per the nature of business unit and its requirement (Riley, 2012). An in-depth
evaluation and analysis will help in identifying most suitable source of finance and raising funds
from the same.

2. Considerations for selecting source of finance


Range of factors affect financing decision of the business unit. It is through detailed
analysis of various sources of finance that the management will be able to acquire funds form
appropriate sources. The management should consider following factors for selecting an
adequate source of finance.
Cost of capital: In modern era not even a single pound is available without costs of
acquiring it. Henceforth, each source of finance has one or other costs associated in monetary
and non-monetary terms (Jonsson, 2008). The clear picture of costs of different financing option
should be analyzed so as to acquire funds from most reasonable source of finance. An evaluation
of various costs involved is necessary to identify its suitability to different business requirement.
Dilution of ownership: The business unit should also identify its desire to dilute
ownership in hands of shareholders. In case of raising funds by way of equity capital ownership
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is transferred to respective shareholders. The organization with sufficient proportion of voting
rights in hands of promoters can go for equity capital. However, the one with limited amount of
ownership has an option to acquire funds through debt capital. It is also one of the important
factors that determines business decision to raise funds (Brigham and Ehrhardt, 2013). This is
due to reason that some of public listed companies allow shareholders' participation while others
don't encourage their participation in decision making process.
Capital structure of the business unit: Another important factor that helps in selecting
most suitable source of finance is capital structure of the company. It is proportion of debt and
equity involved in the business unit that helps in deciding future financing option. In case of high
leverage enterprises; acquiring funds through debt capital is suitable and appropriate option. On
contrary, businesses with low leverage position should go for equity capital. The rational behind
analyzing business capital structure for acquiring long term funds is maintaining an ideal debt-
equity ratio (Keller, 2013). The organization should strive to employ capital in manner that
proportion of equity and debt are balanced.

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Repayment terms: Majority of external financing option has an obligation of repayment


of amount acquired on time. This in turn makes it essential for business unit to evaluate all terms

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and conditions before acquiring funds through external sources of finance (Rashid, 2014). The
financing option with repayment terms that suit to business requirements and its capability
should be selected for acquiring funds. Some of the alternatives such as bank loans also allow
repayment through periodic installments. It is the capability of business unit to make either one
time repayment or partial repayments through installment that helps in deciding most suitable
financing option.
Accessibility to funds: The business unit also selects suitable source of finance on the
basis of its ease of access. There are certain options that helps in acquiring funds without any
complexities and lesser legal formalities. However, other funds has difficult access and involve
lot of complexities (Rashid, 2014). The business unit always strives to acquire funds through the
option that is easily accessible. This in turn helps in meeting financial requirement of the
organization with ease and simplicity.
Transferability: In case of various debt options the business unit has benefit to transfer
loan to third. The option helps in reducing liability by transferring it to relevant parties. This in
turn helps in acquisition of funds and reducing business liability. The clause is suitable fir
various circumstances and benefits the organization into concern. Henceforth, the business unit
should try to avail additional benefits available with innovative financing options now -a- days.
The business unit should evaluate various sources of finance available on above factors
or considerations. This in turn helps in determines most suitable and appropriate source of
financing. It also results in acquiring required amount of funds with efficiency and at reasonable
cost of capital.

3. Capital structure of the company


Capital structure is the framework that describes proportion of the debt and equity
employed within the business unit. In other words, the manner in which business unit finances
all its investment through combination of debt and equity is determined by way of capital
structure. The management should have complete knowledge regarding the amount of debt and
equity employed in business unit (The comptroller and auditor general, 2008). This in turn
assists in future financing decision and enable business unit to acquire funds through most
suitable option. The capital structure for EDF energy needs to be analyzed for selecting most
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suitable financing option. It is through calculation of debt-equity ratio that capital structure of the
organization can be sketched. The same is calculated below and presented in the graphical form.

=

46980
=
30712
= 1.53
The debt equity ratio suggests that business unit is employing higher amount of debt in
comparison to shareholder's equity. The organization has debt equals to approximately 1.53
times of equity (Jonsson, 2008).

Capital structure

30712

Debt
46980
Equity

Figure 1: Capital structure of EDF energy

As per the ideal ratio of 1:2; equity should be double of debt. In present case the
organization has employed equity lower than debt. The business unit henceforth should increase
equity capital so as to be at least at equivalent level to that of debt. In order to improve stability
position of the business unit equity capital should be employed. It is through issue of more
amount of equity shares or utilization of retained earnings that business unit will be able to infuse
more amount of funds in the form of owner's capital (Nogueira, Jorge and Oliver, 2013).
In order to acquire funds for long term through external source of financing; the business
unit should opt for issuing equity capital. The financing option although involves dilution of
ownership; it helps in meeting financial requirement of business unit without any obligation for

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interest payment or repayment. It also supports business strategy to increase equity capital so as
to support debt obligations in the long term (Suto and et.al., 2007). Henceforth, as per the capital
structure of the company business unit should acquire funds by way of issuing equity capital.

Conclusion
The report is an attempt made to analyze the manner in which long term financing
requirement of business unit can be satisfied. The report through analysis of case for EDF energy
brings forth the fact that money should be infused through appropriate sources of finances. The
report discussed above brings forth various sources of finances and their respective implications.
It is through analysis of financing options on the basis of various factors that affect financing
decision; the business unit can decide most suitable source of finance. Moreover, the nature of
business unit and its requirement should also determines most suitable financing option. The
evaluation through out report concludes that EDF energy should acquire funds by way of raising
equity capital. It is due to the fact that business unit requires funds for long term and its capital
structure suggest high leverage position of the business unit.

Sample Report on Financial Markets EDF


Energy

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References
Bierman, H., and Smidt, S., 2003. Financial Management for Decision Making. Beard Books.

Brigham, E. and Ehrhardt, M., 2013. Financial Management: Theory & Practice. Cengage
learning.

HNC business, 2014. Managing Financial Resources and Decisions. [Online]. Available
through< http://www.hnc-business.co.uk/unit2.html >. [Accessed on 24th June
2014].

Jonsson, S., 2008. Industry-embedded financial decision making: The case of a fashion firm.
International Journal of Bank Marketing. 26(1). pp.4256.

Jonsson, S., 2008. Industry-embedded financial decision making: The case of a fashion firm.
International Journal of Bank Marketing. 26 (1). pp.42 56.

Keller, A., 2013. Finance and financial management. GRIN Verlag.

Nogueira, S. P. S., Jorge F. M. S., and Oliver, C. M., 2013. The usefulness of financial reporting
for internal decision-making in Portuguese municipalities. Management Research:
The Journal of the Iberoamerican Academy of Management. 11(2). pp.178 212.

Rashid, A., 2014. Firm external financing decisions: explaining the role of risks.Managerial
Finance. 40(1). pp.97116.

Riley, J., 2012. Sources of finance-choosing the right source. [Online]. Available through:
<http://www.tutor2u.net/business/gcse/finance_choosing_right_sources.htm>.
[Accessed on 24th June 2014].

Suto, I., and et.al., 2007. Financial decision-making: guidance for supporting financial decision
making by people with learning disabilities. BILD Publications.

The comptroller and auditor general, 2008. [PDF]. Managing financial resources to deliver
better public services.
Availablethrough:<http://www.nao.org.uk/wpcontent/uploads/2008/02/0708240.pdf
>. [Accessed on 24th June 2014].

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