Equity and loans from the government

Businesses rely on financing sources to fund expansions, purchases, inventories, and payment commitments. There are two types of financing: short-term and long-term (Watson and Head 2010, p.81). The time span between credit extensions and periodic payments is a key differentiator. Short-term sources include overdraft protection and loans. Businesses obtain goods and services from vendors, and costs must be incurred and repaid (NCERT 2014). Credit cards may provide short-term income. Long-term sources are scarcer due to timeframe and ability to maintain investment (Kling et al. 2014, p.125). Short-term sources are credits extended up to a year (Clarke 2000, p.10). Long-term sources are between 10-20 years.

Objective and Purpose

Core objective of this assignment is to compare and contrast long- and short-term sources of finance. Critically, to equate and differentiate long- and short-term sources of finance which may prove attractive to a business organisation and how it can increase value of company and effect on shareholder wealth is of primary interest. After systematically analysing diverse forms of sourcing finance, discussing which ones are better options and why is within focus. Finally, after identification and definition of types of long- and short-term finance sources, an evaluation is to be done to link them to shareholder wealth and value.

Types of Finance

Types of Short-Term Finance

Indigenous banks

In former days, country bankers and money lenders in private capacity terms used to offer loans exclusively (Beck et al. 2000, p.282). Nevertheless, nowadays, commercial banks are credible sources of short-term finances. Seasonal interest rates are claimed to avoid overexploitation of customers. At critical observation, monopoly dominated by commercial banks has been lost (Serrasqueiro et al. 2011, p.199). Hence, loans can be offered by indigenous bankers, and such capital could meet the working capital needs of short-term financial requirements (Froud et al. 2000, p.98).

Trade credit

Those who supply goods and services extent a form of credit referred to as trade credit. Currently, both minor and significant sorts of businesses are built on credit (Kay 2012). Therefore, stable arrangements between suppliers and respective business organisations are essential as short-term finance. The best manner in which trade credit could be easily secured is coexistence of trust, whereby suppliers have confidence in business organisation once trade credit is obtained. Based on terms of payment on invoice paper, suppliers would customarily send goods and services to business entity; refunds are claimed when such times are due (Hunyadi 1990, p.32). Otherwise, recipient could be obliged to sign document that details payment of money at specified later date. Nevertheless, if firm fails to meet payments, cash discounts could be forfeited, and stretching accounts payable could as well be initiated (Seidman 2005, p.311). Therefore, trade credit thrives well where trust and reliability are cultivated without failing. It is convenient and easy. Secondly, flexibility is of significant worth, considering that with time, credit is increased as the firm becomes bigger (Dadush et al. 2000, p.55). Finally, this type of finance is very spontaneous, as it is informal method of transaction. Nevertheless, threatening challenge to trade credits is charging of exorbitant interests by suppliers and possibility of loss of cash discount in case of payments delays (Radić 2015, p.202).

Instalment credit

Here, goods are bought, and purchase is paid for instalments (Fatemi and Fooladi 2013, p.109). Though payments begin on the go after reception of suppliers, eventual money is paid over stretched timeframe to allow convenience. Mostly, interest is adjusted to the whole price; however, charging on the accruing amount is often way forward. Definitely, for firms with difficulties in amassing working capital, it could be the best source of short-term credit (Giudici and Paleari 2000, p.42).

Advances

Most organisations receive advances as short-term form of finance. They are often sourced from agents and customers to these companies against orders. The credit forms of advance from customers is suitable, because it is favourable to manufacturing business entities, especially those with long-term production cycles, as it becomes cheap source of income. Therefore, advances help companies not investing too much in limited working capital (Duca 2016, p.13).

Long-Term Sources of Finance

Equity and loans from the government

Interest-free perpetual capital is represented by equity capital; therefore, control and right would often follow ownership of equity. As such, it always lies in public or big organisations (Korinek and Cocguic 2010). Nevertheless, government has always supplied loans and equity. However, there is often no attachment of such loans to redeemable preference share capitals. Nonetheless, in rare circumstances, the case could be different when profit is earned by such sector, or fixed returns are made. Normally, 50% of capital is offered on long-term basis, yet rates of interest often depend on varying timeframes (Barrett 2013, p.1821). The benefit is as well limited. It is because it must be adjusted accordingly to interest rate, as nature of earning capacity, cash flow in segment, and other affiliated factors to business entity are worth noting.

Issue debentures and equities

Oftentimes, big business enterprises run short of funds following major investments that spiral decades before coming to completion. Furthermore, investment could be more demanding, considering given time to attract back investment capital and accruing profits (Diebold et al. 2005, p.418). Time spent in following such steps in infrastructure building and establishing new market zones and niches is what could prompt business organisation to be in need of benefitting from long-time source of finance. Lack of adequate funds could compel company issue bonds or debentures, or even equity stock to public (Fama 1998, p.292). Conglomerates and corporations are often the ones fit for securing such. Long-term sources are critical, as soon, companies will not benefit from and rely only on working capital (Yescombe 2014, p.68). Tapping into a variety of sources including the long-term sources of finance is essential, critical, and advantageous. It is because when it comes to loans, equity, and debentures, financial ratios and financial statements are analysed in detail to give informed future of firm’s financial situation (Huff 2011, p.60). Furthermore, sources of capital can be chosen judiciously, considering benefits of long-term sources of finance and challenges. Thus, stakeholders must consider convenient zone of allowing those responsible for financial planning to have window for making deliberate and suitable financial decision when due (Brealey et al. 2015, p.517).

Public deposits

For the public and the private sector, public deposits have been proven to be an important source of long-term investment, even though the bulk could run from two to five years, hence overlapping with the short-term investments as well (Fama 1998, p.295). The only disadvantage of public deposits is that such sources carry hidden security. It would mean that government would intervene to offer rescuing platform in case public deposit segment goes into liquidation. Hence, lenders would be compensated by residue after meeting preferred creditors’ criteria (Fama 1998, p.298).

Capital market

Capital markets are stable source of long-term finance. Indeed, issuing of equity to raise money is often practised by both public and private sector. Nevertheless, these sources of long-term finance require that the affected firm or business entity must occupy a significant place in the capital market ecosystem for such purposes (Barber and Lyon 1997, p.354).

Part 4

Critical Comparison and Contrast between ST and LT Sources of Finance

Types of short-term finance

Indigenous banks

Trade credit

Instalment credit

Long-term sources of finance

Equity and loans from the government

Issue debentures and equities

Public deposits

Capital markets

Frequent and informed decision-making in finance matters are often made every other time by those responsible in a firm, so the body could meet its payroll obligations, expansions, and purchases as planned (OECD 2013). Long-term and short-term sources of finance are compared as core elements of funding in companies, both public and private, even in case of small business enterprises. The major difference between short- and the long-term sources of finance is the period between the instant when the credit is served and period due when investment is paid back (Costa-Font et al. 2012, p.217).

Critically, the short-term sources of finance often span a period up to and less than 12 months (Warnock and Warnock 2008, p.244). Nevertheless, in rare incidences, they could go to as far as one to three years of time, depending on nature of debt or loans extended toward beneficiary. For instance, a mortgage continued for 15-20 years could be considered as of long-term as opposed to that rendered for barely three years (Baker 2015, p.149).

Interest rates charged on short-term sources of finance are relatedly lower, considering that such funds are often tendered for equally short timeframes. Furthermore, they normally attract less risk (Perez 2011, p.17). Therefore, it is common experience that most small scale and large, private and public organisations would be able and willing to benefit from such services. Certainly, there are many sources of short-term finance, and they could entail leases, bank overdrafts, accounts payable as well as loans (Tirole 2006, p.412).

Contrariwise, long-term financing normally involves a larger timeframe between period of lending and paying back the funds to lender (Zaki and Sattar 2011, p.171). Such sessions would vary, but mostly long-term sources of finance can be estimated on average of between three to 30 years. Indeed, as opposed to the short-term loans, the risk involved with long-term sources of finance is higher (Grubb 2011, p.1052). Escalated risk is due to the more substantial amounts of funds borrowed as well as long period to expire before payments are made. As such, the lenders, for instance, commercial banks, would venture into a volatile environment of high risk-taking (Caprio and Aslı Demirgüç-Kunt 1998, p.176). As such, the borrower is often asked to offer forms of collateral to compel them not to default on their payments. Rates charged on long-term loans are often higher compared to short-term ones, mainly because of higher risk involved and the timeframe (Giovannini et al. 2015). Examples entail retained earnings, long-term bank loans, issuing shares as well as leases among others.

In comparison, therefore, both short- and long-term sources of finance offer business entities some form of financial relief, which is a critical support in occasions of financial distress (Lazonick and O’Sullivan 2000, p.26). Short-term sources of finance are very convenient, and because of the lesser interest rates attracted, it is common experience to encounter both big and small investors benefitting from these services of receiving funds (Hillman and Keim 2001, p.127). Nevertheless, only conglomerates or financially stable firms can benefit from long-term sources of finance because of higher rates and huge forms of collateral regarding cost demanded. As the name would suggest, the short-term sources of finance are temporal, and they only deliver funds to offer financial relief for a while. However, the long-term sources of finance require extended periods for heavy investments (Pahud de Mortanges and Van Riel 2003, p.523).

STF – How They Affect/Increase Shareholder Value

Short-term sources of finance significantly affect and increase shareholder value in diverse ways. Based on the findings of related literature review, and hence, as discussed herein, there are many forms of sources of short-term finance (Fernández 2001, p.3). The three forms of such sources include the advances, indigenous banks, and the trade credits. For every investment made, in this case by the shareholders, the economic value is often anticipated, as the cost of capital discounts the cash flow (Stahl et al. 2003, p.269). Once a given amount of money invested would have increased in value after a given period, in this case, short-term, perhaps within one month, the discounted cash flow then brings on board an essential feature that for every dollar invested, one would have accrued some interest in a later date because of the involved transactions (Hillman and Klein 2001, p.130). Short-term forces of finance are investment that increases shareholders’ value. Nevertheless, it is critical to note that other elements come into play, one of which is the factor that short-term sources of finance attract less risk and hence fewer interest rates. Relative to long-term sources of finance, therefore, which attract more risk and hence higher interest rates, the shareholder value to the tune of short-term sources of finance would be moderately lower (Jog and Holst 1997).

LTF – How Both Affect/Increase Shareholder Value

Shareholder value holds a significant place in the understanding of the long-term sources of finance, considering that fact that the success of the organisation is limited to the how much it enriches the shareholders. As such, the increase in the value of shareholders is a critical element in this nature of funding (Anderson et al. 2004, p.174). Some of the forms of long-term sources of finance include offering equities, debentures, public deposits, and capital markets. Causing the stoke prices to escalate and paying dividends increases the shareholder wealth (Charreaux and Desbrières 2001, p.111). In essence, shareholder money invested in an organisation should earn more value, compared to what individual shareholders would benefit if they made personal investments. Limited to this background of experts` literature, it, therefore, follows that long-term sources of finance are the best forms of increasing shareholder value (Cooper et al. 1993, p.24). Shareholder benefits escalate because of the huge interest rates accrued by long-term sources of finance. Nevertheless, it would affect shareholder value in many uncertainties because of extended periods and higher risks taken (Ho 2010, p.75). Figure 1 and Figure 2 in the Appendices represent the balance sheets with the shareholder values and equity for Walmart and Coca Cola.

Conclusion

There are many sources of finance to business entities. However, short- and long-term sources are the principal ones. Short-term sources of finance are customarily limited to a period not exceeding one year. Nevertheless, under special circumstances, they could go up to 3 years. Short-term loans attract lesser risk and lower interest rates because of lower amounts of loans. Contrariwise, long-term sources of finance could take up to one to three decades. They are normally big, and hence, higher risk involved. In this regard, long-term sources of finance would often attract higher rates of interest and collateral, which compel beneficiaries not to boycott honouring their commitments. Advances, indigenous banks, and trade credits are examples of short-term sources of finance, while debentures, public deposits, and capital markets are long-term. The two sources are comparable in that both are critical in offering support and financial relief to the business organisations during times of financial distress. The shareholder value is founded on the principle that as the firm becomes richer, so should the shareholders be enriched; hence, the success of the former determines the growth of the latter. Consequently, such extensional forms of finance source directly affect and escalate the shareholder value. Debentures and equities are long-term source of finance, and benefits are critical and advantageous. It is because when it comes to loans, equity, and debentures, financial ratios and statements are analysed thoroughly to give informed and precedent future of firm’s situation. Furthermore, sources of capital can be chosen judiciously, considering benefits of long-term sources of finance and challenges that accompany them. On the contrary, trade credit is convenient short-term form of finance. Flexibility enjoyed is of significant worth, considering that credit is increased as firm becomes bigger. Finally, this type of finance is spontaneous, and it is informal method of transaction.

Short- and long-term sources of finance are defined principally regarding the timeframe between when the credit is served and when the loan or debt is settled. Short-term sources of finance commonly describe a period of lending equal to or less than one year. The risk involved in the short-term sources of finance is lower because of short duration required. Consequently, many business ventures would often purpose to benefit from such. More access to short-term sources of finance is hence highly competitive, as collateral is not needed, and interest rates are low. On the contrary, long-term financing could fall between three years and 30 years or beyond. Due to the long timeframe between serving of credit and reimbursement, the risk involved is high and hence the need for collateral as well as higher interest rates. Those who offer such funds under the long-term framework would typically stand a high risk, and thus, only conglomerates or well-established business organisations with predictable financial stability benefit from it. The advances, indigenous banks, and trade credits are examples of short-term sources of finance while debentures, public deposits, and capital markets are examples of long-term sources of funding. The shareholder value is limited to these conditions.

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Appendices

Figure 1: Walmart Shareholder Values and Equity

(Source: Investopedia 2016)

Figure 2: Coca-Cola Company Shareholders’ Value and Equity

Assets

Fiscal year is January-December. All values USD millions.

2012

2013

2014

2015

2016

5-year trend

Cash & Short Term Investments

16.55B

20.27B

21.68B

19.9B

22.2B

Cash Only

8.44B

10.41B

8.96B

7.31B

8.56B

Short-Term Investments

8.11B

9.85B

12.72B

12.59B

13.65B

Total Accounts Receivable

4.76B

4.87B

4.47B

3.94B

3.86B

Accounts Receivables, Net

4.76B

4.87B

4.47B

3.94B

3.86B

Accounts Receivables, Gross

4.81B

4.93B

4.8B

4.29B

4.32B

Bad Debt/Doubtful Accounts

(53M)

(61M)

(331M)

(352M)

(466M)

Other Receivables

-

-

-

-

-

Inventories

3.26B

3.28B

3.1B

2.9B

2.68B

Finished Goods

1.17B

1.24B

1.13B

1.03B

844M

Work in Progress

-

-

-

-

-

Raw Materials

1.77B

1.69B

1.62B

1.56B

1.57B

Progress Payments & Other

320M

345M

351M

306M

266M

Other Current Assets

5.75B

2.89B

3.75B

6.65B

5.28B

Miscellaneous Current Assets

5.75B

2.89B

3.75B

6.65B

5.28B

Total Current Assets

30.33B

31.3B

32.99B

33.4B

34.01B

2012

2013

2014

2015

2016

5-year trend

Net Property, Plant & Equipment

14.48B

14.97B

14.63B

12.57B

10.64B

Property, Plant & Equipment - Gross

23.49B

25.03B

25.26B

22.35B

21.26B

Buildings

5.31B

5.61B

5.54B

4.91B

4.57B

Land & Improvements

997M

1.01B

972M

717M

589M

Computer Software and Equipment

-

-

-

-

-

Other Property, Plant & Equipment

-

-

-

-

-

Accumulated Depreciation

9.01B

10.07B

10.63B

9.78B

10.62B

Total Investments and Advances

11.12B

12.38B

14.69B

16.81B

18.46B

Other Long-Term Investments

1.9B

1.98B

4.75B

4.49B

2.2B

Long-Term Note Receivable

-

-

-

-

-

Intangible Assets

27.34B

27.61B

26.37B

24.13B

21.13B

Net Goodwill

12.26B

12.31B

12.1B

11.29B

10.63B

Net Other Intangibles

15.08B

15.3B

14.27B

12.84B

10.5B

Other Assets

2.51B

3.47B

3.02B

2.73B

2.71B

Tangible Other Assets

2.51B

3.47B

3.02B

2.73B

2.71B

Total Assets

86.17B

90.06B

92.02B

90B

87.27B

Liabilities & Shareholders’ Equity

2012

2013

2014

2015

2016

5-year trend

ST Debt & Current Portion LT Debt

17.87B

17.93B

22.68B

15.81B

16.03B

Short Term Debt

16.3B

16.9B

19.13B

13.13B

12.5B

Current Portion of Long Term Debt

1.58B

1.02B

3.55B

2.68B

3.53B

Accounts Payable

1.97B

1.93B

2.09B

2.8B

2.68B

Income Tax Payable

860M

759M

911M

1.52B

1.37B

Other Current Liabilities

7.12B

7.19B

6.69B

6.81B

6.45B

Dividends Payable

-

-

-

-

-

Accrued Payroll

1.05B

933M

997M

936M

857M

Miscellaneous Current Liabilities

6.07B

6.26B

5.7B

5.88B

5.6B

Total Current Liabilities

27.82B

27.81B

32.37B

26.93B

26.53B

Long-Term Debt

14.74B

19.15B

19.06B

28.31B

29.68B

Long-Term Debt excl. Capitalized Leases

14.74B

19.15B

19.06B

28.31B

29.68B

Non-Convertible Debt

14.74B

19.15B

19.06B

28.31B

29.68B

Convertible Debt

-

-

-

-

-

Capitalized Lease Obligations

-

-

-

-

-

Provision for Risks & Charges

-

-

-

-

-

Deferred Taxes

4.58B

5.82B

5.32B

4.33B

3.43B

Deferred Taxes - Credit

4.98B

6.15B

5.64B

4.69B

3.75B

Deferred Taxes - Debit

403M

328M

319M

360M

326M

Other Liabilities

5.47B

3.5B

4.39B

4.3B

4.08B

Other Liabilities (excl. Deferred Income)

5.47B

3.5B

4.39B

4.3B

4.08B

Deferred Income

-

-

-

-

-

Total Liabilities

53.01B

56.62B

61.46B

64.23B

64.05B

Non-Equity Reserves

-

-

-

-

-

Preferred Stock (Carrying Value)

-

-

-

-

-

Redeemable Preferred Stock

-

-

-

-

-

Non-Redeemable Preferred Stock

-

-

-

-

-

Common Equity (Total)

32.79B

33.17B

30.32B

25.55B

23.06B

Common Stock Par/Carry Value

1.76B

1.76B

1.76B

1.76B

1.76B

Retained Earnings

58.05B

61.66B

63.41B

65.02B

65.5B

ESOP Debt Guarantee

-

-

-

-

-

Cumulative Translation Adjustment/Unrealized For. Exch. Gain

(1.67B)

(2.85B)

(5.23B)

(9.17B)

(9.78B)

Unrealized Gain/Loss Marketable Securities

338M

258M

972M

288M

305M

Revaluation Reserves

-

-

-

-

-

Treasury Stock

(35.01B)

(39.09B)

(42.23B)

(45.07B)

(47.99B)

Total Shareholders' Equity

32.79B

33.17B

30.32B

25.55B

23.06B

Accumulated Minority Interest

378M

267M

241M

210M

158M

Total Equity

33.17B

33.44B

30.56B

25.76B

23.22B

Liabilities & Shareholders' Equity

86.17B

90.06B

92.02B

90B

87.27B

(Source: Market Watch 2017)