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Unit VIII Journal

October 8, 2023
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Introduction

External financing requirements refer to the amount of funds that almost every business

needs to raise from external sources to maintain its profitability. In "Financial Management:

Theory and Practice," Brigham and Ehrhardt (2020, p. 519-522) discuss three major corporate

financing sources: retained earnings, debt capital, and equity capital. Retained earnings refer to

the profits that a company has earned and kept over time. Debt capital refers to funds that a

company borrows from lenders, such as banks or bondholders, and must repay with interest.

Equity capital is the money a company raises by selling shares to investors. One of the biggest

benefits of using external sources of finance is that your business has access to a wide range of

business finance solutions. Instead of draining your own savings or drawing money from key

areas of your business, you now have a range of financial tools at your disposal, providing you

with the means to mobilize and Loans for your business needs. Additionally, using external

sources of finance also helps you spread out large costs and make them more manageable. Many

of the products offered are not limited in their intended use, so can be used to support any aspect

of the business. External financing can be a great way to raise capital for a business, but it also

comes with its own set of risks and benefits. Some of the benefits of raising external finance

include speeding up growth, acquiring new equipment, purchasing property, supporting

uneven cash flow, releasing equity, funding marketing campaigns, replenishing supplies,

providing emergency relief, retaining a financial buffer, and delivering capital without losing

ownership or control of your company. However, some of the risks associated with raising

external finance include loss of ownership and control, high cost of financing, the complicated

and expensive financing process, public disclosure of business records, the possibility of losing
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control to investors, the possibility of investors buying shares to make a quick profit by selling

them when the share price increases, and foreign investment risks such as political turmoil, loss

of control over monetary policy, uncontrolled inflation, debt issues, and overly-aggressive

taxation (Brigham and Ehrhardt, 2020, p. 519-522).

Speeding up growth: External financing methods can provide higher sums of money,

enabling companies to invest in their growth more quickly. For example, Total SE issued

perpetual subordinated bonds in the amount of €3 billion, The proceeds from the bonds were

used to finance the group's development strategy, mainly the acquisition of renewable energy,

especially 1.7 billion euros for the acquisition of 20% interest of Adani Green Energy Limited

and 50.8% shares of SunPower company, they can quickly implement their investment projects

in India and U.S without first having to save up sufficient equity capital.

Acquiring new equipment: External financing can help businesses purchase new

equipment that they need to grow and expand. For example, Vietnam Airlines (HVN.HM) is

expected to sign an initial agreement to buy about 50 Boeing (BA.N) 737 Max jets in a deal

valued at about $7.5 billion (Reuters, 2023, September 10), Vietnam Airlines said It is known

that this airline is developing a plan to develop its aircraft fleet for the period 2025-2030, with a

vision to 2035, in which aircraft investment is a key project to ensure the airline achieves its

goals and strategic vision. set out in the recovery and sustainable development phase. To

successfully carry out this deal, Vietnam Airlines has 3-4 more years to prepare procedures for

this deal, including raising capital. Vietnam Airlines leaders also said they will work with

financial institutions to find opportunities and solutions to arrange capital for the most suitable

project, including short and medium-term solutions for prepayments. (PDP Financing), aircraft

sales and leaseback (sales & leaseback).

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Purchasing property: External financing can help businesses purchase property that they

need to grow and expand. For example from Bank financing: Bank financing is not available for

foreign buyers in much of the world. However, when it is, it can be your best option. Generally

speaking, loan-to-value ratios are lower than you’re used to. These days, you’ll typically be able

to borrow 50% to 70% of the property purchase price at best. Terms are shorter than those

available from U.S. banks. Thirty-year loans are unheard of. Interest rates are typically floating

rather than fixed. Can from Seller financing or Private lenders, etc. It’s important for businesses

to weigh these options against the risks and benefits of raising external finance before making

any decisions.

Supporting uneven cash flow: External financing can help businesses manage uneven

cash flow by providing them with the funds they need to cover expenses during slow periods.

For example, external financing can help businesses replenish supplies, provide emergency

relief, and retain a financial buffe.

Releasing equity: Releasing equity: External financing can help businesses release equity

in their assets, which can be used to fund growth and expansion or invest in new projects. One

example of external financing helping to unleash equity is through equity financing. Equity

financing is a method of raising capital by selling shares of ownership in a company to outside

investors. Some examples of external equity financing include angel investors, crowdfunding,

venture capital firms, corporate investors, and listing on an exchange with an initial public

offering (IPO).

Funding marketing campaigns: External financing from sources such as Debt financing,

Equity financing, Crowdfunding, Venture capital, and Angel investors can help businesses fund

marketing campaigns that they need to grow and expand.

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Replenishing supplies: External financing can help businesses replenish supplies that

they need to continue operating. External financing can be a great way to replenish supplies.

However, it is important to note that the type of external financing that is best suited for this

purpose may depend on the specific needs of the business. Here are some examples of external

financing that can help replenish supplies:

Trade credit: This is a type of external financing where a supplier allows a business to

purchase goods or services on credit. This can be a good option for businesses that need

to replenish their supplies quickly but do not have the cash on hand to do so.

Asset-based lending: This is a type of external financing where a company uses its

assets, such as inventory or accounts receivable, as collateral for a loan. Asset-based

lending can be used to replenish supplies, as well as other business expenses.

Providing emergency relief: External financing can provide businesses with the funds

they need to deal with unexpected expenses or emergencies. For example, the International

Monetary Fund (IMF) has provided emergency financing to 81 countries during the COVID-19

pandemic. The IMF has responded to the coronavirus crisis with unprecedented speed and

magnitude of financial assistance to member countries, especially to protect the most vulnerable

and set the stage for inclusive and sustainable recovery. The IMF has also provided policy

advice, financial support, capacity development, and debt relief for the poorest.

Retaining a financial buffer: External financing can be a great way to retain a financial

buffer. For businesses relying on internal funds, they often have just enough to cover running

costs and maybe a small reserve. However, using external finance means you have a financial

buffer that can be used if unforeseen issues arise. One example of external financing that can

help retain a financial buffer is debt financing. Debt financing is a type of external financing
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where a company borrows money from a lender and agrees to pay it back with interest over a set

period of time. Debt financing can be used to replenish supplies, fund marketing campaigns, as

well as other business expenses.

Delivering capital without losing ownership or control of your company: There are

several external financing methods that a business can use to raise capital without losing

ownership or control of the company. Some of these methods include:

Family and friends: This is a common method of raising capital for small

businesses. It involves borrowing money from family and friends who are willing to

invest in the business.

Bank loans and overdrafts: Banks offer loans and overdrafts to businesses that meet

their lending criteria. These loans can be secured or unsecured, and they usually come

with interest rates.

Venture capitalists and business angels: Venture capitalists and business angels are

investors who provide funding to startups and small businesses in exchange for

equity. They can also provide mentorship and guidance to help the business grow.

New partners: Bringing on new partners can be a way to raise capital without losing

control of the company. New partners can provide funding, expertise, and resources

to help the business grow.

Share issue: A share issue is when a company issues new shares to raise capital. This

can be done through an initial public offering (IPO) or a private placement.

Trade credit: Trade credit is when a supplier allows a business to purchase goods or

services on credit. This can be a useful way to manage cash flow.

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Leasing and hire purchase: Leasing and hire purchase are financing methods that

allow businesses to acquire assets without paying the full cost upfront.

Government grants: Governments offer grants to businesses for various purposes,

such as research and development, job creation, and environmental sustainability.

Each of these methods has its advantages and disadvantages, so it’s important to

carefully consider which method is best for your business. It’s important for businesses to weigh

these benefits against the risks of raising external finance before making any decisions.

Importance of External Financing

Financing activities are transactions that involve the movement of funds between a

company and its investors, owners, or creditors for long-term growth and economic goals. in

addition, financing activities include transactions involving financing sources: spontaneous

liabilities, external financing, internal financing effect to changes in owner’s equity, long-term

liabilities, short-term loans, and the cost to issue debt. These activities affect the equity and debt

liabilities present on the balance sheet and the cash flow from financing activities section in the

cash flow statement. “There will be a financing deficit if the additional financing is less than the

additional assets, and a financing surplus if the additional financing is greater than the additional

assets” (Brigham and Ehrhardt, 2020, p. 513).

Importance of External financing is a crucial aspect of business development. It refers to

the money borrowed from banks or investors to support the growth of a company. External

financing is important because it can help a company grow and expand its operations. The

amount of external financing needed (EFN) is the amount of financing required from outside
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sources to remain profitable. Determining the EFN is based on several factors, including the

company’s financial position, growth rate, and cost of capital (Brigham and Ehrhardt, 2020, p.

519-522).

The EFN formula is used to calculate the amount of external financing required by a company.

The formula is as follows:

EFN = (A/L) x SGR - (PM x SGR)

Where A is total assets, L is total liabilities, SGR is the sustainable growth rate, and PM

is the profit margin.

External financing can be obtained from various sources such as banks, venture capitalists,

private equity firms, and angel investors. However, it’s important to note that external financing

comes with advantages and disadvantages. For instance, external financing can help a company

grow faster than it would with internal financing alone. However, it also comes with the risk of

losing control over the company if too much equity is given up.

In conclusion, external financing requirements are an important aspect of a company’s

financial operations. It’s important for companies to understand their EFN and determine the best

sources of external financing for their business needs.

Key Factors in the external financing requirements

Key Factors in the Additional Funds Needed (AFN), Equation The AFN equation shows

that external financing requirements depend on main five key factors: (1) Sales growth rate, (2)

Capital intensity ratio, (3) Spontaneous liabilities-to-sales ratio, (4) Profit margin, (5) Payout

ratio:
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Sales growth rate: The relationship between sales growth rate and external financing

requirements is a well-known concept in corporate finance. According to a post on Economics

Stack Exchange, the higher the rate of growth in sales or assets, the greater the need for external

financing (bank loans, debt securities, or equity). The Net assets are proportional to sales, then

the additional assets required to support any growth in sales are Additional net assets required =

Growth rate * initial net assets. Required external financing = (Growth rate * initial net assets) –

reinvested earnings. The post states that if the firm’s net assets are proportional to sales, then the

additional assets required to support any growth in sales are Additional net assets required =

growth rate * initial net assets. Required external financing = (growth rate * initial net assets) –

reinvested earnings. The post also explains that the faster the planned growth rate, the greater the

need for external financing. At higher growth rates, the firm requires additional capital. At lower

growth rates, reinvested earnings exceed the addition to assets and there is a surplus of funds

from internal sources; this shows up as negative required external financing. For example,

Vietnam Airlines (HVN.HM) is expected to sign an initial agreement to buy about 50 Boeing

(BA.N) 737 Max jets in a deal valued at about $7.5 billion (Reuters, 2023, September 10),

Vietnam Airlines said It is known that this airline is developing a plan to develop its aircraft fleet

for the period 2025-2030, with a vision to 2035, in which aircraft investment is a key project to

ensure the airline achieves its goals and strategic vision. set out in the recovery and sustainable

development phase. To successfully carry out this deal, Vietnam Airlines has 3-4 more years to

prepare procedures for this deal, including raising capital. Vietnam Airlines leaders also said

they will work with financial institutions to find opportunities and solutions to arrange capital for

the most suitable project, including short and medium-term solutions for prepayments. (PDP

Financing), aircraft sales and leaseback (sales & leaseback).

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Capital intensity ratio: The capital intensity ratio is a financial metric that measures the

amount of capital required to generate $1 of revenue. It is calculated by dividing the total

average assets of a company by its revenue in the same period. Capital-intensive industries are

characterized by substantial spending requirements on fixed assets relative to total revenue.

Companies with significant fixed asset purchases are considered more capital intensive, i.e.,

require consistently high capital expenditures (Capex) as a percentage of revenue. The firms

having high capital intensity ratios need to invest more in assets and require more external

capital. Growing firms with high growth rates generally need more external capital. Firms having

a high spontaneous liabilities-to-sales ratio need less external capital due to an increase in

spontaneous liabilities. For example TotalEnergies SE (TTE) invests in a smart logistics system

on the ERP platform to control inventory in less than 25 days, much lower than competitors in

the same industry such as Shell plc (44 days) and the team effective team of trade credits then

they can achieve a given level of growth with fewer assets and thus less new external capital.

Spontaneous liabilities-to-sales ratio: Spontaneous liabilities are the obligations of a

company that are accumulated automatically as a result of the company’s day-to-day business.

An increase in spontaneous liabilities is normally tied to an increase in a company's cost of goods

sold (or cost of sales), which are the costs involved in production. Spontaneous liabilities often

include accounts payable, which are short-term debt obligations owed to creditors and suppliers,

wages, and taxes payable. The firms having high capital intensity ratios need to invest more in

assets and require more external capital. Growing firms with high growth rates generally need

more external capital. Firms having a high spontaneous liabilities-to-sales ratio need less external

capital due to an increase in spontaneous liabilities. One way of raising this ratio is by paying
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suppliers in, say, 30 days rather than 10 days, needing to negotiate with suppliers and making

maximum use of trade credits.

Profit margin is an important factor to consider when determining the external financing

requirements of a business. External financing needed (EFN) is the amount of outside money a

business needs to complete a transaction such as a major capital investment, merger, or

acquisition. The EFN definition is the difference between assets and the total of liabilities and

equity on a pro forma balance sheet. The profit margin is the percentage of revenue that remains

after all expenses have been deducted from sales. It is calculated by dividing net income by

revenue. A higher profit margin indicates that a company is more profitable and has more cash

available to finance its operations. Therefore, if a company has a high profit margin, it may not

need to borrow as much money from external sources to finance its operations. In conclusion,

profit margin is an important factor to consider when determining external financing

requirements. A higher profit margin indicates that a company is more profitable and has more

cash available to finance its operations, which may reduce the amount of external financing

needed.

Payout ratio is another important factor to consider when determining external financing

requirements. The payout ratio is the percentage of earnings paid out as dividends to

shareholders. A higher payout ratio indicates that a company is paying out more of its earnings

as dividends and retaining less for future growth. This means that the company may need to

borrow more money from external sources to finance its operations. A firms with a high payout

ratio need more external capital as they are paying higher dividends. Therefore, if a company has

a high payout ratio, it may need to borrow more money from external sources to finance its

operations. In conclusion, profit margin and payout ratio are two important factors to consider
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when determining external financing requirements. A higher profit margin indicates that a

company is more profitable and has more cash available to finance its operations, which may

reduce the amount of external financing needed. Conversely, a higher payout ratio indicates that

a company is paying out more of its earnings as dividends and retaining less for future growth,

which may increase the amount of external financing needed.

In addition to external financing requirements, also examined agency conflicts, which

arise when the interests of a company’s managers and shareholders are not aligned. For example,

if a company’s management team is more focused on their own personal gain, such as through

high salaries or bonuses, they may make decisions that do not align with the best interests of the

shareholders.

One type of agency conflict is known as the “principal-agent problem.” This occurs

when the management team, the agents, are not acting in the best interest of the shareholders, the

principals. An example of this might be where a management team decides to invest a large

portion of the company’s assets into a venture they believe is high risk with a high potential

return, although the shareholders might have preferred a more conservative approach.

In conclusion, external financing requirements are an important aspect of a company’s

financial operations. Key factors such as the company’s financial position, growth rate, and cost

of capital must be considered when determining the need for external financing. Agency

conflicts, such as the principal-agent problem, can also impact the effectiveness of a company’s

financial decisions, and it’s crucial for a company to recognize and take action to mitigate these

conflicts.
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External Financing and Agency Conflicts

An agency problem is a conflict of interest inherent in any relationship in which one

party is expected to act in the best interests of another party. In corporate finance, agency

problems often refer to conflicts of interest between company managers and the companies to

raise capital from external sources such as banks, bondholders, or equity investors. Agency

conflicts can also be a factor for external financing requirements. This occurs when the interests

of the manager and the shareholder are entirely different in a company's shareholders. Managers,

acting as representatives of shareholders, are responsible for making decisions that maximize

shareholder wealth. External financing requirements refer to the need for some examples of

agency problems from external financing including:

Debt overhang: When a company has too much debt, it may be reluctant to take on new

projects or investments because the additional debt could push the company into financial

distress. This can lead to a situation where the company is not maximizing shareholder

value.

Adverse selection: Adverse selection occurs when a borrower has more information

about their financial situation than the lender. This can lead to situations where borrowers

take on loans that they cannot repay, which can harm lenders and shareholders.

Moral hazard: Moral hazard occurs when a borrower takes on excessive risk because

they know that they will not bear the full cost of that risk. For example, if a company

takes on too much debt, it may be more likely to engage in risky investments because it

knows that the lenders will bear most of the risk.

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To reduce agency problems, companies can take several steps such as aligning interests,

monitoring managers, using contractual incentives, improving corporate governance, and

increasing transparency. Companies can take several steps to reduce the agency problem. Here

are some ways:

Aligning interests: Companies can align the interests of managers and shareholders by

offering stock options or other incentives that reward managers for making decisions that

benefit the company.

Monitoring: Companies can monitor managers to ensure they are making decisions that

are in the best interest of the company. This can be done through regular audits,

performance evaluations, and other forms of oversight.

Contractual incentives: Companies can use contractual incentives to encourage

managers to act in the best interest of the company. For example, managers may be

required to hold a certain amount of company stock or may be penalized if they engage in

unethical behavior.

Corporate governance: Companies can improve corporate governance by having an

independent board of directors that oversees management decisions. This can help ensure

that managers are acting in the best interest of the company and its shareholders.

Transparency: Companies can increase transparency by providing shareholders with

more information about management decisions and financial performance. This can help

reduce information asymmetry between managers and shareholders.

For example Agency Conflicts: Musk, 51, after taking control of Twitter on Thursday,

October 27, after completing a controversial $44 billion deal. He immediately fired the CEO,

chief financial officer, head of legal and general counsel. Parag Agrawal, the CEO who has
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repeatedly clashed with Musk over the number of Twitter users and some algorithmic issues

related to Twitter's platform, is said to be leaving his job with a salary of $42 million after while

serving as CEO for less than a year. Twitter's former top lawyer Vijaya Gadde, who earned $17

million in 2021, was said to have shed tears in April when Musk's takeover first came to light.

Insider said she is waiting to receive a $12.5 million payout. Twitter's securities filings show that

senior executives are entitled to a one-year salary and an accelerated vesting of at least a portion

of their unvested bonus shares if they are fired for any reason - except reason - within one year of

the company changing hands. Musk's reason for firing the four people 'for cause' is unknown,

The Information reported.

For external Financing and Agency Conflicts in VietNam: Mr. Nguyen Ba Duong has

just decided to leave Coteccons, after 17 years of building and turning this business into one of

the largest construction contractors in Vietnam. Mr. Duong's decision to resign follows a series

of recent personnel changes at Coteccons, related to internal conflicts within the company that

started when business results began to decline in 2017. From partners strategy, the relationship

between the Kustocem group and Coteccons leaders turned to a state of confrontation when

Kustocem once convened an extraordinary meeting and asked Mr. Nguyen Ba Duong to resign

as chairman. The new Chairman of the Board of Directors, Mr. Bolat, is authorized to sign all

documents and carry out necessary procedures related to changing information on the Business

Registration Certificate, notification/registration of change of representative. according to

company law. The person replacing Mr. Duong in both of these positions is Mr. Bolat Duisenov

(Kazakh nationality) who is the capital owner representative and CEO of Kusto Vietnam (major

shareholder holding 17.55% of Coteccons capital). In particular, in previous internal conflicts,

Kusto Vietnam was the shareholder who continuously demanded the dismissal of Mr. Duong and
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Mr. Nguyen Sy Cong (then general director). Mr. Duong's departure from the position of

Chairman of the Board of Directors of Coteccons is also considered the most important

personnel change of this construction contractor after a long period of internal conflicts with

major shareholders because of conflicts of interest in operations. enterprise.

About Coteccons's External Financing and Agency Conflicts/ Business decline/ Chairman

Nguyen Ba Duong and the old leadership team have just left the hot seat:

Coteccons is a construction joint stock company, stocks trade code on Vietnamese stock

market is CTD has just announced its consolidated financial report for the third quarter of

2020 with a sharp decrease in revenue, from VND 6,225 billion to VND 2,807 billion.

Gross profit decreased by 34% compared to the same period last year, leading to a

decrease in gross profit margin for the 5th consecutive period, at 6%. After deducting

expenses and taxes, the enterprise's after-tax profit is 89 billion VND, down nearly 50%

compared to the third quarter of 2019. Accumulated for 9 months, CTD reached 10,332

billion VND in revenue and 369 billion VND in profit after tax, down 36% and 22%

respectively compared to the first 9 months of last year. Previously, in the second quarter

of 2020, Coteccons' revenue also decreased by 46% over the same period. Meanwhile,

Conteccons used to be a large construction enterprise in Vietnam. During the golden

period of 2016 - 2018, Coteccons' revenue reached over 20,000 billion VND and

continuously grew year by year. Profit after tax is about 1,500 billion VND per year. The

above unfavorable business situation has strongly reflected in the stock price. Currently

CTD is falling sharply to the region of 56,400 VND/share, while in August 2020 this

code was listed at around 80,000 VND/share, in the VN30 stock basket - a group of 30

strongest stock codes on the exchange. stock.

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Conclusion

In corporate finance, the agency problem often refers to conflicts of interest between a

company's management and its shareholders. The manager, acting as the representative of the

shareholders or principal, is responsible for making decisions that maximize shareholder wealth

while also maximizing the manager's own wealth. External financing refers to the process of

raising capital from sources outside a business. This can include issuing bonds, taking out loans,

or selling shares of stock. External financing can help businesses achieve their objectives by

providing access to financial solutions that are not available through revenues and savings alone.

The relationship between external financing and agency conflicts is complex. External financing

can exacerbate agency conflicts by creating additional incentives for managers to act in their own

best interests rather than those of the shareholders. However, external financing can also help

mitigate agency conflicts by providing an external mechanism for monitoring and disciplining

managers who do not act in the best interests of shareholders.

In conclusion, external financing and agency conflicts are two important concepts in

corporate finance. While external financing can exacerbate agency conflicts, it can also help

mitigate them by providing an external mechanism for monitoring and disciplining managers

who do not act in the best interests of shareholders.

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References

Alexander, H. (2022, October 30). Musk fired Twitter execs 'for cause' to 'avoid paying out millions'.

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executives-cause-attempt-avoid-paying-MILLIONS.html

Brigham E. F. & Ehrhardt M. C. (2020). Financial Management Theory & Practice (16th ed.).

Cengage Learning Inc.

Brigham , E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th

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COTECCONS CONSTRUCTION JOINT STOCK COMPANY. (2020, October). BOARD OF

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max-planes-bloomberg-news-2023-09-10/

VnExpress. (2020, October 6). Chairman of Vietnam’s largest contractor resigns. VnExpress

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