As to what extent do you really support the strategy of financing expansion of Goodprice Supermarkets Limited through the use of retained profits I actually support this tactic of financing expansion through retained earnings as Goodprice has £33 million.
Looking at the two proposals for the introduction of a Goodprice supermarket in Ashton underneath Ribble, Alternative A could cost Goodprice £12 , 000, 000 to develop. Choice B will cost the Goodprice £3. 6 million. Therefore Goodprice has enough retained revenue to afford the two options and still be able to save some of it is retained revenue. This may profit Goodprice because they could use some of the retained profit to pay off the long term financial obligations which may result net income increasing because business will not have to spend anymore interest charges from the revenue.
One more why I actually support this strategy of loans expansion through retained earnings is that Goodprice already relies heavily on debt capital; their gearing ratio in 2009 was 54%. Despite the fact that Goodprice’s gearing percentage has been lowering steadily via 2004 because it was at 65% to 2009. If Goodprice was to finance their enlargement through external sources of financing such as a loan from the bank this might incur interest costs which may result in the gearing percentage increasing. On the other hand there are various other strategies that Goodprice may still value to raise financial internally besides retained earnings.
As Goodprice is still a personal limited firm there is continue to an option of flotation in which the company can float the shares of the company around the stock exchange. This may benefit the business as they could find investors wishing to buy shares which may mean large sums of money can be raised. The ever lowering gearing percentage could motivate potential shareholder to the business as their results may be likely to be higher due to decreasing amount of interest payments that Goodprice will be paying. On the other hand a issue with flotation is the fact it is costly as papers have to be made to advertise the organization and clarify its financial situation.
Also there could be a separating of possession and control, as shareholders will own your control yet mangers will run the day-to-day businesses of the business. This may trigger conflict as it can take longer to process decisions and there might be a chance which the new shareholders may don’t agree with the decision to broaden the business. In conclusion I totally support this strategy of auto financing expansion through retained income, this would be apporpriate because obtaining finance externall may not be likely as there has been a drop in the banks willingness to lend through the credit crunch.
As well obtaining any longer long term loans may possess a negative effect on the business as it might increase interest charges which in turn consequently may possibly increase the gearing ratio. Maintained profit might an appropriate alternative as it it quick to obtain and will not incur interest charges.
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