Can for long-term and medium-term loans and borrowings
As the capital of the company is completely equity-based, we can go for Long-term and medium-term loans and borrowings. The capital structure of the company won’t get distorted as this particular debt won’t lead to an excess of dependency and liability towards the outside parties.
So, I would recommend RP PLC to obtain medium-term finance and long-term finance through internal funding and external funding. Long term funding is for more than 5 years, depending on the terms, conditions, and criteria of the contract whereas medium term sources are usually for 3-5 years.
Debt Collection – Collection of the money the debtors owe the company. RP PLC can also look for invoice factoring.
Limiting the usage of working capital – Controlling the working capital expenses would leave the owner with more funds to make investments without any debt obligation.
This source of finance is not that preferable while looking for external finance as it is more expensive compared to debt finance because the dividends and bonus shares are given to the shareholders are not tax-deductible. At the same time, it is beneficial for the company as it offers an immense pool of liquid funds for a relatively long term.
DEBENTURES
Leasing can be used as an advantage by RP Public limited company, as in this the capital the company has received via different sources can be retained to finance the working capital of the company and other operating expenses. Surplus funds can be then used for investment purposes. Opting for hire purchase or agreement of lease will allow the company to delay in making payments which are as good as having the supplies financed by some external party. In a hire purchase system as well as in lease, there is an option to be the sole owner of the asset at the end of the tenure by completely buying the asset. Residential Properties can make use of its large equipment through leasing; without making huge capital expenditures, and instead use those funds to buy shares of the unlisted company. They just need to pay rent to use the equipment for three to five years, based on the contract.
Both investment and financing decision underlays the ground decisions regarding determination of ways to acquire funds as well as ways to make an effective and efficient allocation of the same. Both the decisions are taken with the primary motive of maximizing shareholder’s wealth. RP PLC can make use of its existing finances to obtain more funds by borrowing i.e. undertaking debt obligations or by going public and selling common shares to the general public.
The borrowing company i.e. RP plc needs to evaluate the feasibility of this investment in the unlisted company. They can do so by analyzing the rate of return this investment is likely to generate and compare it with the estimated cost of capital they are going to incur. If the rate of return is more, then the project is feasible or else the company should drop this investment idea altogether.
The finance department of RP plc should conduct an in-depth analysis comparing debt financing with the other recommendations and figure out which particular source should be used or a combination of which particular source would be most advantageous for the company’s future prospects.
https://www.toppr.com/guides/business-studies/financial-management/financing-decision/
https://www.textroad.com/pdf/JBASR/J.%20Basic.%20Appl.%20Sci.%20Res.,%203(3)144-150,%202013.pdf
https://efinancemanagement.com/sources-of-finance/internal-source-of-finance
https://smallbusiness.chron.com/internal-sources-finance-47552.html
https://efinancemanagement.com/financial-leverage/pecking-order-theory
https://corporatefinanceinstitute.com/resources/knowledge/finance/pecking-order-theory/