Gamuda Company uses internal and external financing to increase their capital. It is important for Gamuda to run their business to know about the different sources from which funds could be improved. It is also important to know the relative benefits and losses of different sources, so the choice of the right finances can be made. (Brigham, Houston, 2010)
Internal Sources of Finance for Gamuda
Internal sources of finance are those that generate from the business. A business, for example, to generate funds internally by the accelerated collection of accounts receivable, inventory and having to dispose of surplus profits. Internal sources can only meet the needs of the business is limited. This includes retained profits and the sale of property by Gamuda Company.
Retained Earnings
The remaining profit is also called surplus or undistributed profits. This is done when all production costs, including management of over-cost, and all things, which are deducted from the sales revenue. Once profit is made taxes has paid on them. After a tax deductible business may decide to either of two things with them:
(1) Distribute them to the owners of the business, or
(2) Retain them for the future use of the business.
The remains of this financial effort were saved by a back-up at the time of financial need and can be used later for the expansion or development. Retained profit is a non-cost source of valuable financial. (Tutor2u, 2009.)
For Example, Gamuda has the retain profit about RM204, 154,000 in 2009. This can be one of the sources of finance for Gamuda.
Appropriateness of Retained Earning for Gamuda
After our group discussion, we think that by using this source of finance is not appropriate for the Gamuda Company to get the fund. This is because retain earning can cause dissatisfaction among the shareholders because they will get the lower dividend, even they earn RM204 million. Beside that, it also defined as uncertain profit for the Gamuda Company that is fluctuating always due to the environment factors such as recession.
Sales of Fixed Asset
Gamuda Companies can also increase internal finance by selling of the assets for cash. This can include real estate, patents, works of art, and other assets controlled by the company. Sales of property must be done carefully to avoid loss or expose the company against losses in the future. When the fixed asset is surplus and abandoned, it can be sold to raise funding in demanding times for business. (Tutor2u, 2009.)
If Gamuda want to use its assets, it may consider selling and leasing back assets which may be sold and then rented or hired from a business which now own the assets. This may mean paying more money in the long term, but to provide cash in the short term to avoid a crisis.
Appropriateness of Sales of Fixed Asset for Gamuda
We think this is appropriate for the Gamuda as a source of finance. Since Gamuda is a leader in turnkey Engineering & Construction Company, so it is easier for the company to sell his property to the public to earn profit. There is no interest payments are required.
However, Gamuda also need to consider, if the assets are sold then the business will lose the opportunity to generate revenue from its. So Gamuda need to analyze properly before sold the fixed asset.
External Sources of Finance for Gamuda
External sources of finance including those source that outside the organization, such as suppliers, creditors and investors. When a large amount of money needed to be raised, it usually done through the use of external resources. External funds may be expensive compared with those raised through internal resources.
In some cases, business is required to mortgage its assets as security while obtaining funds from external sources. External sources of finance used by Gamuda can either be
Ownership capital
Non-ownership capital
Ownership capital
Ownership of capital is money invested in the business by the owners themselves. This is to finance capital by the owners and partners can also share or purchased by the company's shareholders. Gamuda is issue the ordinary shares to increase their funding.
Ordinary Shares
Ordinary shares also know as equity share of common stock is a unit investment in a company. Shareholders have the privileged access to receive dividends, which based on the value of state-owned shares and the profits made by the Company. They also have the right to vote in the meetings of the Company. Gamuda Company is issue the ordinary shares to increase the finance for long-term fund. (Economywatch, 2007.)
For example, during the financial year, the Company increased its issued and paid up capital from RM2,005,016,108 to RM2,009,257,108 by the issuance of 4,241,000 new ordinary shares of RM1.00 each for cash arising from the exercise of options under the Company’s ESOS.
Appropriateness of Gamuda Issue Ordinary share
It is appropriate for Gamuda using it because dividends paid to shareholders is not required. Therefore, there is no burden on companies in this regard. Furthermore, equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a company. As it stands last in the list of claims, it provides a cushion for creditors in the case of closure of companies.
It also providing Gamuda Company’s creditworthiness and the confidence to prospective credit provider and funds can be raised through equity issue without creating any charge on the assets of the Gamuda Company. Therefore, free to be mortgaged for the purpose of borrowings, if the need be. (Teachnet-uk, 2008.)
But Gamuda Company also needs to consider the risks of this source of finance which are:-
(i) Investors who want fixed income may not like the equity shares as the equity shares fluctuated return.
(ii) The cost of equity is generally higher than the cost of raising funds through other sources.
(iii) The issuance of additional equity shares dilutes the voting rights, and equity earnings of existing shareholders.
(iv) More postponement of procedural formalities involved while raising funds through issuance of equity shares.
Non-ownership capital
Unlike the ownership of capital, non- ownership capital does not allow creditors to participate in or influence the result of how business is conducted. The main obligation of non-capital ownership is to pay back the amount borrowed money and interest. Gamuda is using
long-term borrowing which is Murabahah Medium Term notes,
short-term borrowing which is commercial paper
leases
bond
conversion warrant
Long-term borrowing (Murabahah Medium Term notes, MTN)
A long-term bank loans as a financial resources will often be much larger amount of money. Loans are useful for businesses that have started or are looking to grow. The loans are often used to purchase fixed assets (see balance sheet), such as machinery and vehicles. A business will pay the bank back each month to pay installments and interest costs.
For example, Gamuda has using MTN to finance their fund which amounting to RM480 million was drawn down by the Company in prior year. The first and second issuance of RM180 million and RM300 million MTN respectively with tenure of 5 years was completed on 24 January 2008 and 4 June 2008 respectively.
Appropriateness of Murabahah Medium Term notes for Gamuda
It is appropriate for Gamuda using it because bank will provide timely assistance to businesses by provides funds as and when required by it. Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept confidential. In addition, loan from a bank is a flexible source of finance as the loan amount can be increased according to business needs and can be repaid in advance when funds are not needed.
But the management also need to consider the banks may make detailed investigation of the company’s affairs, financial structure etc., and may also ask for security of assets. This makes the procedure of obtaining funds slightly difficult.
Commercial Paper (CP)
Commercial paper appeared as short-term financial resources in our country in the early nineties. The CP is unsecured promissory notes issued by the company to raise funds for a short time, varying from 90 days to 364 days. It is issues by one company to other businesses, insurance companies, pension funds and banks. The total amounts raised by the CP are generally very large. As the debt completely unsecured, a company with a good credit standing can issues CP. (Khairul-syahir, 2008.)
Gamuda using the Commercial Papers of RM35 million (2008: RM35 million) represents the share of the total of RM70 million (2008: RM70 million) drawdown by HHDSB. This share of borrowings is secured by an undertaking by the Company to assign all rights, titles, benefits and debentures security for the payment of the secured indebtedness.
Appropriateness of Commercial Paper for Gamuda
We think this is appropriate for the Gamuda as a source of finance. This is because CP is sold without warranty and does not contain the restrictive condition. It freely transferable instrument and it has high liquidity. Besides that, it provides more funds than other sources and generally payments make by Gamuda was lower than the cost of commercial bank loans.
Other than that, commercial paper can provide a continuous funding for the Gamuda. This is due to maturity may be adjusted to meet the needs of the Gamuda. Commercial paper maturities can be repaid by the sale of new securities
But the management also needs to consider the size of money that can be raised through commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time.
Leases
Leasing is simply a commercial arrangement whereby an equipment owner (the lessor) convey to the equipment user (the lessee) the right to use the equipment in return for the payment of specified rentals over an agreed period of time.
Leasing is a form of rent. Leased assets usually have plant and machinery, vehicles, but may also be computer and office equipment. There are two 2 type of lease which are operating leases and finance leases.
Operating leases
Operating lease is a lease agreement between lessor and lessee in which:
a.) lessor supplies equipment for tenants
b) the lessor is responsible for servicing and maintenance of leased equipment
c) the lease term is short, less than the life of the asset, so that by the end of the lease agreement, the lessor can lease the equipment to others, and get a good rent for it, or sell used equipment.
Finance leases
Finance lease is rental agreement between the user of the leased asset (lessee) and the finance provider (lessor) for the most part, or all of the useful lives of assets are expected. Characteristics to finance lease are the lessee to choose the equipment and suppliers, tenants using the equipment for business purposes, the lessor purchases the equipment, the lessor remains the title for the equipment during the lease term and others
Suppose the company decides to get a company car by using leasing. A financial house will agree to act as lessors in lease finance, and others will buy from a distributor and rental car for the company. The company will take a car from a car dealer, and make regular payments (monthly, quarterly, six monthly or yearly) rental home financing in accordance with the return of interest. (Scribd, 2007.)
Appropriateness of Leasing for Gamuda
It is appropriate for Gamuda using it because this will enable Gamuda to get a property with a lower investment and simply documentation makes it easier to finance its assets. Gamuda can use the lease rental payable by the lessee deducted to calculate taxable profits. It also providing funds without depleting the possession or control of the business .
But sometimes, leasing it may result in higher payout obligation in case the equipments not found useful and the lessee opts for premature termination of the lease agreement
Issue Bond
Bond is a debt security, in which the issuer owes the holder a debt, and credible, depending on the bond agreement, shall pay interest (coupon) and / or to repay the principal at a later date. Bond also is a formal contract to pay interest on borrowed money with a fixed interval.
Appropriateness of Bond for Gamuda
It is appropriate for Gamuda issue it to raise their fund. This is because it allows the issuer to call beck the bond before maturity date normally if interest decline. It helps the issuer, but hurt the investors. The interest expense pay to investors help to lower the effective tax rate for an issuer, and accounting professionals can use financial formulas to calculate the desired level of debt
Conversion Warrant
Warrant such a option. It gives the holder the right but not the obligation, to buy a security at a specific price, time and volume. It is not like the option that issued by a company, whereas options are exchange instruments. The security represented in the warrant (usually share equity) is delivered by the issuer, not by the investors who hold shares.
Gamuda will often include warrants as part of the new-issue offers to entice investors into buying the new security. A warrant may also increase shareholder confidence in the stock, provided that the value of the underlying security does not actually increase over time.
Appropriateness of Warrant for Gamuda
We think it is appropriate for Gamuda as financial resources. This is because the company offers the opportunity to sell bonds with lower interest rates in exchange for the opportunity to participate in the company's success, if it does well.
But the Gamuda management also need to concern about Dilutes earnings per share that may weaken owner control of the company.
PUT CONSOLIDATE INCOME STATEMENT, BALANCE SHEET,
CASH FLOW
