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QUESTION TWO EasyHealth Limited is a five year private limited company specialized in the manufacture of a range of health drinks, foods and supplements aimed at the fitness market
QUESTION TWO EasyHealth Limited is a five year private limited company specialized in the manufacture of a range of health drinks, foods and supplements aimed at the fitness market. At present their biggest customers are health food shops and fitment centers. However, now that their brand has become established, the wealthy owners, who also manage the business, are convinced that sales could be increased dramatically through the opening of an internet shop. They are currently considering how best to fund the expansion of the business, Funds would be needed to set up the website, expand manufacturing at the factory and employ more staff to deal with administration, dispatch and delivery of the web orders. It is estimated that K2million would be needed for the expansion. At present the market value of the company's equity is K4million and the company has loans of K500, 000, repayable in six months' time. The company has cash built up from retained earnings of K1.3million. Required: () Outline THREE appropriate sources of medium/long term finance that may be available to EasyHealth Limited to finance its expansion. Presume that government grants and leasing are NOT appropriate. (9 marks) (ii) Discuss FOUR factors that EasyHealth Limited should take into account when deciding on the source of financing for its expansion (16 marks) Total (25 marks)
Expert Solution
The given case can be analysed below:
EasyHealth Limited is a company engaged in the manufacture of health drinks, foods and supplements in the FMCG sector. The company is planning for expansion by entering into e-retailer industry. THe company has retained earnings. There are various sources of finance for the company.
The following are the various sources of finance available for Easy Health Limited from the perspective of medium / long term funds segment. Since, the company is only 5 years of old, it can be considered as a Start-up company and mainly it is into expansion business.
| Sources of Finance | Explanarion |
| 1. Personal Financing | Entreprenuers of the Company have retained earnings. This can be used a source to fund the business. Investors will not put money into a deal, if they see that Entreprenuer has not contributed any money from his personal sources. |
| 2. Vendor Financing | Here, the Company lends money to one of its Customers so that the customers can buy its products. It also takes place when many manufacturers and distributors are convinced to defer payment until the goods are sold. This means extending the payment terms to a longer period. |
| 3. Factoring | Factoring is an arrangement under which a firm (called Borrower) receives advances against its receivables, from a financial institution (called Factor). The Factor also provides certain allied services - Debtors follow-up, maintenance of Debtors Ledger, on behalf of the Borrower. |
| 4. Venture Capital Financing | Venture Capital Financing refers to financing of high risk ventures promoted by new, qualified entrepreneurs who require funds to give shape to their ideas. Here, a Financier (called Venture Capital Fund) invests in the Equity or Debt of an Entrpreneur (Promoter / Venture Capital Undertaking) who has a potentially successful business idea, but does not have the desired track record or financing backing. |
The following factors needs to be considered by EasyHealth Limited at the time of financing:
1. Cost of Capital:
Cost of Capital is the minimum rate of return that must be earned on investments, in order to meet the rate of return required by the investors. It is the discount rate required to evaluae the feasibility of the projects.
2. Optimal Capital Structure:
The finance manager has to establish an optimum capital structure and ensure maximum rate of return on investments. Capital structure represents the ratio of debt and equity to be maintained by the Company.
3. Profit Planning and Control:
Profit planning ensures attainment of stability and growth. Profit planning and control is a dual function which enables the management todetermine the costs it has incurred. and revenues it has earned.
4. Fixed Assets management:
Fixed assets are financed by long term funds. Finance Manager has to ensure that these assets should yield the reasonable returns proportionate to the investment.
5. Corporate Taxation:
Corporate Taxation is an important function of the Financial Management, for the former has a serious impact on the financial planning of a firm. Since the corporation is a separate legal entity, it is subject to an income-tax structure which is distinct from that which is applied to personal income.
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