Table of ContentsA. Introduction.....................................................................................................................2

B, Contents..........................................................................................................................2

I, Task 1: Opening your own business – Hospitality and Tourism..................................2

II, Task 2: Pine Furniture PLC.........................................................................................4

1. Sources of finance available to Pine Furniture PLC...................................................4

1.1 Debt........................................................................................................................4

1.1.1 Leasing and hire purchase..................................................................................4

1.1.2 Overdraft.............................................................................................................5

1.1.3 Debentures and bonds........................................................................................5

1.1.4 Factoring............................................................................................................5

1.1.5 Government loan................................................................................................5

1.2 Ordinary shares.....................................................................................................5

1.3 Preference shares (preferred share)......................................................................6

1.4 Retained earnings..................................................................................................6

2. Assess the implications of the different sources of finance for Pine Furniture PLC...6

2.1 Debt........................................................................................................................6

2.2 Ordinary shares.....................................................................................................7

2.3 Preference shares..................................................................................................8

2.4 Retained earnings..................................................................................................9

III, Task 3.........................................................................................................................9

IV. Task 4.......................................................................................................................12

1. The importance of preparing Cash Flow Budgeting and Overtrading.................12

2, Cash Flow Budget..................................................................................................13

3, Cash shortages and surpluses...............................................................................14

C. Conclusion....................................................................................................................16

D. Appendix.......................................................................................................................17

1. Task 3.........................................................................................................................17

2. Task 4.........................................................................................................................18

E. Reference.......................................................................................................................19

A. Introduction.

Core businesses of Pine Furniture Public Limited (Pine Furniture PLC) are designing, manufacturing and delivering furniture to customer’s door at unbeatable prices. With its 20-year experience, Pine Furniture PLC would like to expand the business in Vietnamese market. In order to do that, the company will need to raise 15 million pounds by considering several financial options. It has to find a suitable source of finance so that Pine Furniture PLC could run a success business in Vietnamese market. Besides, a cash budget must be carefully analyzed with the aim of preventing risks for later process of the company. In addition, to any company or organization, a careless plan will lead to series of financial risk to the company. That will express how important the processes of making a financial plan for even a small company.

B, Contents.

I, Task 1: Opening your own business – Hospitality and Tourism.Nowadays, opening own business is a recent trend among students in general and BTEC

programs members in particular. To start their business, students have so many choices in the midst of variety kinds of business such as Food and beverage, Financial and accounting services, Trading, Production… To start a business is not easy for anyone, especially for a student, there will be so many jobs to do including selecting source of finance, preparing capital, making marketing planning and lots of things else.

In a bunch of kinds of business segments, it is very difficult for me to choose a suitable one. Meanwhile, I have to consider several factors to determine the feasibility of my concept business. The first factor is how the recent 2010 economic situation in Vietnam will affect the development my project. It is not natural that I choose Hospitality and Tourism sector for my future business. If a person wants to start his own business, no matter what kind of business is, the first thing that he has to do is researching and planning the business. This is a key point to be successful for any business owner because a well-written business plan is essential to starting and running a business. Business plans are required when applying for business loans or seeking investors. A good business plan describes in detail a business' mission and goals, and how these goals will be achieved. And the first thing to be mentioned in a business plan is confirming the possibility of the business itself by researching the marketing and current economic situation of the target market that owner want to start his career in. Towards me, I choose Hospitality and Tourism sectors in Vietnam for many reasons such as Vietnam’s resources, Vietnam’s economic situation in 2010, personal characteristics, chance of success… and many things else. The first factor is the economic situation of Vietnam in year 2010, this issue is playing a very important part in deciding the likelihood to be able to develop of a initial business. From year 2007 to 2010, the world has suffered from the most serious crisis of finance. This crisis has been

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resulting in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. Almost every country was affected, including Vietnam, this country, from year 2007 to 2009, has gone through so many to financial problems due to high inflation rate and weak management. Yet in the 2010, Vietnam has been showing a rapid recovery movement in many financial sectors such as GDP (gross domestic products), agriculture, forestry, fishery and tourism. In my chosen sector, Tourism, there are many positive signs that confirm a business in this area will be very successful. Tourism is a potential land for starting business because of it speedy enlargement in both quantity and stability. For example, international visitors to Viet Nam in 9 months of 2010 were at an estimate of 3,731,900, rose by 34.2% against in the same period last year. Of which, visitors coming for tourist purposes went up by 43.3%; for business purposes by 39.8%; and for visiting relatives by 2%. Beside, Vietnam’s GDP is expected to reach $102.2 billion in 2010, rise 6.7%, compared to the government’s target of 6.5%. Generally, GDP ratio of Vietnam is now having an upward trend, promising gradual recovery in the next few years.

(www.veer.vn )

Overall, all of that information is obviously prove that Tourism industry in Vietnam is truly a gold mine for who are willing to set the first step into business’s world like me.

When I have chosen the right sector, the next step is to select a type of the ownerships including sole trader, partnership and limited company. Being a student seems to be the biggest problem when deciding the appropriate ownership types. So what are the disadvantages of being a student, who might be living with and supported by family? I will have to face up with two mains tribulations: difficulty in finding source of finance and lack of experience. Partnership ownership will be a perfect solution for my situation because of several advantages it brings:

Partnerships are relatively easy to establish; however time should be invested in developing the partnership agreement.

With more than one owner, the ability to raise funds may be increased.

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The profits from the business flow directly through to the partners' personal tax returns.

Prospective employees may be attracted to the business if given the incentive to become a partner.

The business usually will benefit from partners who have complementary skills.

Finally, I have to verify the fitting source of finance for my business as a tourism characterized company. The answer for my financial support seems to be included in the way I choose type of ownership. There are several source of finance such as government aid, business owner, borrowing from the bank, and others way of borrowing. In this case, raising capital from business owners is the best way out because of my ability and its suitability for confirmed ownership’s type as a partnership based company. This is kind of a small business so it does not require too much financial resources, and I could afford by my own saving, borrowing from parents or relatives and calling support from the other experienced partner. On the other hand, I should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, and what steps will be taken to dissolve the partnership when needed.

II, Task 2: Pine Furniture PLC

1. Sources of finance available to Pine Furniture PLC Toward all types of business (sold traders, partnerships, and limited companies), there are

so many ways to raise financial fund such as owners’ funds, profits, loans and overdrafts trade credit government grants, hiring and leasing, issuing shares selling assets… Yet they are all catalogued in four main groups that are suitable for Pine Furniture PLC: debts, retained earnings, ordinary shares, and preference shares.

1.1 Debt.When someone has a debt, it means that he/she has an amount of money owned to

someone else (person or organization). In this case, debt is a term that is likely to reflect a form of loan issued to the company by public or the banks. Moreover, in a financial view, debt may include factoring, hire purchase, leasing, and venture capital. These debts will usually have to be returned with an interest rate.

1.1.1 Leasing and hire purchaseLeasing is a process by which a firm can obtain the use of a certain fixed assets for which

it must pay a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services or the assets under the lease contract and the lender is the owner of the assets. The relationship between the tenant and the landlord is called a tenancy, and can be for a fixed or an

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indefinite period of time (called the term of the lease).The consideration for the lease is called rent.

Hire purchase is a type of installment credit under which the hire purchaser, called thehirer, agrees to take the goods on hire at a stated rental, which is inclusive of therepayment of principal as well as interest, with an option to purchase. Under thistransaction, the hire purchaser acquires the property (goods) immediately on signingthe hire purchase agreement but the ownership or title of the same is transferred onlywhen the last installment is paid.

1.1.2 Overdraft When an organization want to spend more money than it has in its current bank account,

this is called overdraft. Comparing to bank loan, bank overdraft is a short-term activity. It is also limited by the quantity and time, interest rate is also different because the bank could apply a daily rate to your debt. A business must consider its structure and purpose of profiting to decide to use loan or overdraft, the former is for long-term and the latter is for short-term.

1.1.3 Debentures and bondsThere are both similarities and differences between debenture and bonds. First, they are

both issued to borrow money from people with an attractive interest rate. But for some reasons, bond is more secured than debenture, it means that it is more risky for people to buy debentures. Companies are usually using debenture as a source of finance, they offer a very high rate of interest to attract people. Apart from debentures, bond is normally issued by government and assures people of priority when any problems occur. On the other hand, low interest rate is also a disadvantage to bonds. Everything has two sides and this is obviously true in debenture and bond case. Bond is secured but has a low interest rate while debenture offers a gorgeous interest rate with risks.

1.1.4 FactoringFactoring is a method that enables a company or organization its accounts receivable to

another. When the company apply this method, it may feel too difficult to get the repayment from debtor clients. Then it “sells” the debt to someone else with a price that equal to 80 – 85% of the debt’s value, in return, the company will immediately receive cash to continue doing business.

1.1.5 Government loanIt is just simple a loan that a company own the government. Government loan is usually

has a low interest rate that will give the company many advantages. Because the purpose of government loan, in some case, is to reduce the unemployment rate and support for the company.

1.2 Ordinary shares This is the most common way to any modern company now. Ordinary shares of a

company are usually offered to anyone who wants to buy (public). People buy share because

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they want to receive the dividends when company make profits. Yet ordinary share does not guarantee someone who owns it a constant dividend every month. Besides, ordinary share could be exchanged between people without any regulations.

1.3 Preference shares (preferred share)Preference share which provides a specific dividend that is paid before any dividends are

paid to ordinary holders, and which takes precedence over ordinary share in the event of liquidation. Like ordinary share, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike ordinary shares, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company's assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible.

1.4 Retained earningsRetained earnings means the action that the company takes an amount from the last

season of business earned profit to keep on going the investment instead of paying share holder as dividends. This is a kind of internal finance, but it still influence shareholders by that they haven’t received dividends and known that the company are lack financial source. The image of the company may be affected leading to losing market shares which is related to market power.

2. Assess the implications of the different sources of finance for Pine Furniture PLC

Those four sources of finance available to Pine Furniture PLC are not always perfect, and the company needs to consider between its benefit and risks. Those risks may be tax effects, legal restrictions, dilution of control, bankruptcy, financial risks and so on.

2.1 Debt The first thing to be considered when a company would like to issue debt is the concern

with dividends and tax rate for debts. In this case, Pine Furniture PLC should carefully study the relationship between elements like tax rate, interest rate and cost of debt. The company has to find a way to reduce the cost of debt based on its related issues. According to the Cost of debt formula:

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Cost of Debt = Interest (1−tax )

Market Valueof Debtx100

From the equation, we could easily realize that if the tax rate raises it will result in a decreasing in Cost of Debt. So the company’s job is to choose the right moment, which will be confirmed by current corporate tax rate, to issue new or more debts. For example, in the Pine Furniture PLC’s cash flow information, it wants to issue debts (debenture) at a price of £1,000 per unit, corporate tax at 25%, interest rate at 12% per annum. Then we could calculate the Cost of Debt for this case is 9% compared to these of another case with higher corporate tax rate at 30%: 8.4%. By going through this example, it will be definitely confirmed that when the tax rate goes up, the Cost of Debt goes down, and vice versa.

From the first view on Cost of Debt, it seems to be so easy for Pine Furniture PLC to take control on issuing debt. Yet the company must keep an eye on financial risk and legal restrictions when choosing debt as a source of finance. Rising fund by issuing debt is usually at a large amount of money, Pine Furniture PLC has to carefully calculate its investments on even the smallest issue. In Vietnam, if Pine Furniture PLC wants to issue debt, they have to meet some requirements about company’s power in case the company cannot pay back for creditors. There is a lesson for every company that if they want their business to be safe, they should be overly dependent on debt. Moreover, Pine Furniture PLC should care about the legal restrictions of debt in Vietnam. For instance, when financial problems occur, Pine Furniture cannot pay the interest or root for the creditors, it has to master the restriction and law about the issuing of debt in case of being sued. This emphasizes the issue that on any situation, Pine Furniture PLC has to pay for interest on debt first whether they make profit or not, the failure to pay this interest may take the company to a court. Even in the circumstance of bankruptcy, the company must do anything to return money to creditors that play a role as the first priority of the company.

The action of issuing debt of Pine Furniture PLC does not only affect its own status but also interfere with stakeholders, specifically its existing shareholders. Firstly, when bad situations happen to Pine Furniture PLC, the company has to take paying debt as a priority. Preference shareholders will be the next to receive fixed month (annual) dividends, ordinary share may lose everything when Pine Furniture goes bankrupt.

2.2 Ordinary shares Issuing ordinary shares is now being used by many companies when they want to expand

business or pay for investment. Yet it is not simple for a company to issue ordinary shares for the first time (Initial Public Offering - IPO) in Vietnam. Pine Furniture PLC has to come up with some requirements such as minimum charter capital (VND 10 billion), Operating makes profit in the last two consecutive years, and having a feasible plan for the use of capital from stock issuance… If Pine furniture has already meets these requirements to carry out issuing new shares, it will be a big chance for the company to attract more potential investors, and make more profit for its existing shareholders.

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But there is still one concern from Pine Furniture is that how tax adjustment affects on the amount of shares they issue. The answer is ordinary share cost is not influenced by any kind of tax rate so when calculating this figure, tax adjustment will not be required. But for Pine Furniture PLC’s share holder, there is a tax called dividend’s tax that they have to keep an eye on in case of tax arrears.

On the other hand, ordinary share’s holders is differentiated holders of other kinds of share because they have the right in a legal way to vote to decide some important issues of the company such as business strategy, profit distribution, increase or decrease in the capital… Thus, it is obvious that if Pine Furniture PLC has more ordinary shareholders, they accidently increase the risk of the dilution of control in company’s management system. There still a solution to prevent control’s dilution is centralizing decision making process based on the core of CEO. Accordingly, the CEO of should hold as many shares as possible to maintain leader’s power as well as focusing on issuing shares that only be available for limited quantity of potential investor.

If Pine Furniture PLC decides to issue more new shares (both ordinary and preference), different perceptions will come up in shareholders’ mind. First, potential shareholders may think that the Pine Furniture PLC is dealing with financial problem so it has to raise fund by the action of issuing debt. Others may try to get more and more shares in order to receive extra dividend. Anyway, issuing new share may cause a change in Pine Furniture PLC’s share price. Obviously, the number of shares available in a given company is limited at any given point, and thus as more and more shares are bought, the value of those shares automatically increases.   Likewise where those shares are sold and the market becomes flooded with one type of security, the value falls. So Pine Furniture must control the number of shares issued in the stock market so as to keep the price stable.

In addition, investment in ordinary shares is said to be risky rather than on preference shares or credits. Because of the way about how dividends are paid in each occasion with debt, preference and ordinary shares. Ordinary shareholders will be the last one to receive dividends in the month or at any time confirmed by Pine Furniture PLC. If the company loses on the market, there will be no dividend at the end of the year also because it is not compulsory to the company. The worst situation is when Pine Furniture goes bankrupt, ordinary shareholders will lose everything including their investments in the company without its responsibility.

2.3 Preference sharesThere a both similarity and difference between preference share and ordinary shares.

Firstly, preferred share’s cost is also not affected by any tax rate, thus, the tax adjustment is not related in the process of calculating these cost. Yet unlike ordinary shareholders, preference shareholders (debt holders also) do not have any accesses in Pine Furniture PLC’s management. They are more secured than ordinary shareholders because of the fixed dividends received each month (year). Thus, it is more likely for the company to suffer from financial problem rather than control dilution in dealing with preference shareholders. In some words, Pine Furniture PLC

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should try to raise fund for expansion by issuing preference share because it is easier to deal with control dilution and dividend payment method arrangement.

Preference share is more secured than ordinary share when financial risks occur. Holders of this kind of security have no voting right but they will receive a constant payment for dividends monthly (annually). This is the second factor that Pine Furniture PLC must take responsibility when financial problems occur, after debt factor. It means that the dividend payment for preference shareholders is compulsory to the company at any circumstances.

2.4 Retained earnings Retained earnings are totally different from shares because those are influenced by tax

rate. The cost of retained earnings is proportional to value of tax rate. Then it is easy to understand that shareholders only receive dividend when the cost the retained earnings are lower than total value of the profit Pine Furniture PLC makes. When using this method, the only cost to be mentioned is the opportunity cost without presence of other direct costs.

When the company makes profit, shareholders are the people who have the right to decide what to do with that amount of money. There will be two ways, the first way is dividing the profit according to the ratio of shares that each shareholder has, second way is that profit earning will be retained as an investment in others new projects that may have the possibility to bring back even more profit of the last season. Yet this solution should not be used as a primary strategy, because when being carried out it requires collecting of so many shareholders comments. Some investors may want to get more profit from projects, but the others may want to receive their dividend to invest in their own projects that they think are more feasible to succeed than those offered by Pine Furniture PLC.

III, Task 3When investing in a company, investors are all expect high return. Cost of capital

measure the rate investors expect to earn from their investments. Pine Furniture PLC issues shares, investors buy shares and become shareholders of the company, they hope to get profits. Weighted Average Cost of Capital (WACC) is average cost of debt and equity that the company has to pay. The higher WACC, the better it is. However, the company expects to obtain higher return than WACC due to average cost.

There are four options that available for Pine Furniture PLC to raise £15,000,000 for its business expansion:

100% ordinary shares 60% ordinary shares and 40% debentures 50% ordinary shares and 50 preference shares 100% debenture notes.

For the first option, Pine Furniture PLC will issue 100% ordinary shares.

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Option 1

Sources of finance Cost of finance Weighted WACC

Preference shares 9.1% 7.407407% 0.67407%

Ordinary shares 24.3% 92.592593% 22.5000001%

Cost of Capital 23.1740701%

Table 1

This option has brought Pine Furniture PLC the highest Cost of finance leading to a very risky position for such a new company in Vietnam. Moreover, the stock market is not always stable, even not mention a careful consideration of investors when decide to buy shares from what company. As a result, it is very difficult for Pine Furniture PLC Vietnam to attract potential investors when it tends to carry out IPO. Thus, with a high proportion of ordinary shareholders, Pine Furniture PLC, Vietnam has to pay a huge deal of dividends, which can lead to a significant loss of the company’s profit.

Option 2For second option, the company will issue 60% ordinary shares and 40% debentures.

Source of finance Cost of finance Weighted WACC

Preference shares 9.1% 7.407407% 0.67407%

Ordinary shares 24.3% 70.370373% 17.10000064%

Debenture 9% 22.22222% 1.9999998%

Cost of Capital 19.77407044%

Table 2

The second solution for Pine Furniture PLC, Vietnam’s financial planning offers the leader board of the company a second highest cost of finance of about 19.77%. This can be a safe option when the company issue just about 22.22% of debt. Yet it is still high in cost of capital among 4 options.

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Option 3In this situation, Pine Furniture PLC will issue 50% ordinary shares and 50% preference

shares.

Source of finance Cost of finance Weighted WACC

Ordinary shares 24.3% 64.81481% 15.74999883%

Preference shares 9.1% 35,18519% 3.20185229%

Cost of Capital 18.95185112%

Table 3

For this case, the company will enjoy a very reasonable cost of finance at 18.95% without the concern of debt’s interest payments. It seems to be a very good solution for the company to raise fund for business expansion. When it makes profit, it will pay dividend for shareholders, satisfy them and make them want to invest more and more to Pine Furniture PLC.

Option 4

With the last option, Pine Furniture PLC decides to issue 100% all of debenture with the £1000 face value at 12% per annum.

Source of finance Cost of finance Weighted WACC

Ordinary shares 24.3% 37.03703% 8.99999829%

Preference shares 9.1% 7.407407% 0.67407%

Debentures 9% 55.55556% 5%

Cost of Capital 14.67406829%

Table 4

At first, it appears to be the most suitable solution for the company because of the lowest cost of finance. But Pine Furniture PLC is a new company in Vietnam, it will be very risky when issue a huge amount of debts. The total value of interest that the company has to pay annually will be very much. If the business goes well, it will be a good enough solution, but when problem occurs, it will be a disaster for the company because of the inability to pay for creditors. So, Pine Furniture PLC must have a very careful consideration when choosing this option.

Personally, I think that the option 3 is the most suitable solution for Pine Furniture PLC. Because its cost of finance is low enough to attract the possibility to be success. It values 18.95%, lower than option 1 and option 2. The last option seem to be very attractive but issuing

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100% of debt is much precarious than 50% of preference shares and 50% of ordinary shares. Like I have mentioned above, debt is a deadly trap for such a new company, in this case Pine Furniture PLC, when entering Vietnamese market.

IV. Task 4

1. The importance of preparing Cash Flow Budgeting and OvertradingPoor cash flow management is one of the reasons cited for any types of business failure.

To Pine Furniture PLC, the work of preparing Cash Flow Budgeting is the most important duty that has to be done before doing anything. Cash is the gasoline that help businesses run, Pine Furniture PLC just need it like any others company. A well-prepared cash budget will tell the CEO of the company about the way money moves into and out of his business; it is the difference between just being able to open a business and being able to stay in business. A cash flow analysis is a method of checking up on the firm’s financial health. It is the study of the movement of cash through Pine Furniture PLC’s business to determine patterns of how it takes in and pays out money. The goal is to maintain sufficient cash for firm operations from month to month.

In addition, cash flow budget will help the CEO determine the cash shortage of each month in order to apply appropriate adjustment. For instance, if your cash flow turns negative for any one month, you will have to borrow money for that month from family or friends, investors, or from a bank or other financial institutions. Then, if your cash flow is positive the next month, you can repay that loan, that’s adjustment for cash flow. Besides, the CEO may also set a target and determines the minimum closing balance for each month or quarter as well.

Cash Flow Budget preparation as well as overtrading is very important element that included in Pine Furniture PLC, Vietnam’s financial planning. Overtrading occurs when the company is too hasty in expanding business’s operation. If a company becomes overtraded, it is likely to face up with liquidity problems and running out of working capital. As a result, financial management is very important for Pine Furniture PLC, Vietnam to prevent unexpected severe condition to company’s finance.

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2, Cash Flow Budget.

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

I Cash inflows

1 Cash received 75,000 90,000 108,000 129,600

2 Credit sales 187,500 712,500 855,000

Total cash inflows 75,000 277,500 820,500 984,600

II Cash outflows

1Key equipment &

machinery1,000,000

2 Sawing machine 500,000 500,000

3 Salaries 112,500 123,750 136,125 149,737.5

4 Building rental 7,500 7,500 7,500 7,500

5 Material Cost 375,000 412,500 453,750 499,125

6 Overhead 45,000 54,000 64,800 77,760

7 Tax 25,000 25,000

8 Advertising 75,000 75,000 75,000

9 Other costs 37,500 45,000 54,000 64,800

Total cash outflows 2,077,500 742,750 791,175 1,398,922.5

III Net cash flows (2,002,500) (465,250) 29,325 (414,322.5)

1 Opening balance 3,000,000 997,500 532,250 561,575

2 Closing balance 997,500 532,250 561,575 147,252.5

Table 5

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3, Cash shortages and surpluses. According to the cash flow budget table above, it is obvious that the figures of net cash

flow of Pine Furniture PLC, Vietnam are covered by negative theme except for 3 rd quarter. This could be seen in the following chart of the fluctuations of net cash flow:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Net Cash Flow -2002.5 -465.25 29.325 -414.3225

-2250

-1750

-1250

-750

-250

250

Net Cash Flow

Axis Title

Thousand Pounds

Figure 1: Net Cash Flow

As can be seen in the figure, the net cash flow of the 1st quarter is the lowest value among 4 quarters. It could be explained because this is the first quarter that Pine Furniture PLC runs in Vietnam, it has to spend on many assets such as Key equipment & machinery (£1 million) and Sawing machine (£500,000). These are compulsory spending for a company operating in such a new market, it is easy to understand that the company has to prepare for an enormous costs for several starting months. Moving to next 2nd quarter, the company has shown a leap in net cash flow, about 4.3 times lower than these of the first quarter. From this quarter, Pine Furniture PLC starts paying tax, advertising costs and increasing amounts of salaries, material cost… but this company still makes enough profit to reduce negative net cash flow. There are several reasons for this increasing in profit, first, the brand of Pine Furniture becomes more familiar to Vietnamese customers leading to a higher level of demand. This trend is followed by the next quarter, 3rd quarter even has positive net cash flow (£29325). Pine Furniture PLC has caught needs and wants of customer to get the attention of them and become a popular brand in Vietnam. This is a very good sign for Pine Furniture PLC because more customers mean facilitating the future business of the company. On the other hand, the last quarter shows a decreasing trend of cash flow. It is easy to understand that because of the 50% cash for buying sawing machine has to be paid in this 4th quarter. Besides, rapid increasing in salaries and material cost, overhead and miscellaneous costs make the value of net cash flow negative again (-414,322.5).

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Cash sale is one of the most important figures that the CEO of Pine Furniture PLC Vietnam concerns. It could be said that cash inflow is the main supporting for the company, and Pine Furniture PLC has a very positive sign when the cash inflow boosts steadily through the year. This is clearly shown in the chart below:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 0

200

400

600

800

1000

1200

75

277.5

820.5

984.6

Cash inflow

Cash inflow

Thousand pound

The chart shows a positive theme for cash inflow of the year 2011 of Pine Furniture PLC. It is obvious that the figure will continue to rise. This is a positive sign while cash out flow is much more fluctuated which can be seen in the following chart.

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1st Quarter 2nd Quarter 3rd Quarter 4th Quarter0

500

1000

1500

2000

2500

2077.5

742.75791.175

1398.9225

Cash Outflow

Cash Outflow

Thousand Pound

This Cash outflow is the cause for negative net cash flow in 1 st quarter, 2nd quarter and 4th

quarter. Pine Furniture has to apply new strategies that suitable for the recent company’s situation such as trade credit, debt collection policies, discount policies, bank loans… For example, at the first quarter, the cost of new equipments and machine are too high, and the company could apply the trade credit method to reduce initial investment. By this way, the cost will be divided in smaller reasonable parts spread out in 4 quarters. In addition, bank loans is also a good way to make up for the loss of the company in a quarter, this loan could be returned with the profit of the next quarter. By applying fluently these methods, Pine Furniture PLC could ease cash shortage in the first year it runs in Vietnam.

C. Conclusion. In summary, when a company first steps in a new market, it has to face many obstacles.

Pine Furniture PLC must wisely deal with some problems from the initial step of finding appropriate source of finance for the company such as risk, dilution of control, financial, legal, and bankruptcy. Besides, financial planning is also very important to the company when building cash flow budget and choosing suitable option to raise money for business expansion. Pine Furniture PLC is an expected company with positive prospective in future to grow, gain market shares in Vietnamese market.

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D. Appendix

1. Task 3*Cost of finance:

Cost of debt = Interest x(1−tax)

Market value of debt x 100 =

£ 1000 x 12 % x (1−25 % )£ 1000

x 100 = 9%

Cost of ordinary share = given Cost of equity for Pine Furniture PLC = 24.3%

Cost of preference share = Dividends

Market value of share x 100 =

£ 5£ 55

x 100 = 9.1%

WACC = [ E

E+Dx ℜ] + [

DE+D

x Rd]

WACC: Weighted average cost of capital

Re: Cost of equity

Rd: Cost of debt

E: Market value of Equity

D: Market value of Debt

Before new venture:

Total capital = £10,000,000 (value of ordinary shares) + £2,000,000 (value of preference

shares)

= £12,000,000

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After venture:

Capital need to raise in Vietnam £15,000,000

Deduce Total capital = £15,000,000 + £12,000,000 = £27,000,000

*Example by option 3: 50% ordinary shares & 50% preference shares

50% of ordinary share = 50% x £15,000,000 = £7,500,000

=>Weight of ordinary share = £ 7,500,000+£ 10,000,000

£ 27,000,000x 100 = 64.81481%

50% of preference share = 50% x £15,000,000 = £7,500,000

=>Weight of preference share = £ 7,500,000+£ 2,000,000

£ 27,000,000x 100 = 35.18519%

WACC of ordinary share = Cost of ordinary shares x Weight of ordinary share = 24.3% x

64.81481% = 15.74999883%

WACC of preference share = Cost of preference shares x Weight of preference share = 9.1% x

35.18519% = 3.20185229%

Cost of capital = WACC of ordinary share + WACC of preference share = 18.95185112%

Source of finance Cost of finance Weighted WACC

Ordinary shares 24.3% 64.81481% 15.74999883%

Preference shares 9.1% 35,18519% 3.20185229%

Cost of Capital 18.95185112%

To process on the others options, using the same method of calculating shown in the example above.

2. Task 4The way to calculate net cash flows, opening balance, and closing balance

Take example for the 1st quarter, calculation for other quarters is similar to it.

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Net cash flows = Cash inflows – Cash outflows

= £75,000 - £2,077,500 = £-2,002,500

Opening balance for the 1st quarter is £3,000,000

Closing balance for the 1st quarter = Net cash flows + Opening balance

= £-2,002,500 + £3,000,000 = £997,500

Closing balance for the 1st quarter is opening balance for 2nd quarter, closing balance for 2nd

quarter is opening balance for 3rd quarter, and so on. Thus, the closing balance for the last quarter is £147,252.5

E. Reference

1. BPP Professional Education, 2004, Managing finance resources and decisions, 1st edition, Aldine House, London.

2. Vietnam Business News, retrieved 2010, from the article Economic situation in nine months of 2010: http://vietnambusiness.asia/economic-situation-in-nine-months-of-2010/

3. Helium, retrieved 2010, from Understanding a cash flow statement :

http://www.helium.com/items/1115712-what-is-a-cash-flow-statement-and-what-it-includes

4. Ezinearticles, retrieved 2010, from Factoring vs. Invoice Discounting:

http://ezinearticles.com/?Factoring-vs-Invoice-Discounting&id=723261

5. Startupnation, retrieved 2010: http://www.startupnation.com/steps/55/10-steps-open-start-

business.htm

6. Business.gov, retrieved 2010, from Write a Business Plan:

http://www.business.gov/start/business-plan/

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