Question

Gabriel plc has an annual turnover of Rs 3 million and a pre-tax profit of Rs 400,000. It is not quoted on a stock exchange and the family that own all the shares have no intention of permitting sale of shares to outsiders or provided that more finance themselves. Similar to many small and medium sized firms, Gabriel has used retain earnings and a rolled-overdraft facility to finance expansion. This is no longer seen as adequate, particularly now that the bank manager is pushing the firm to move to a term loan as its major source of external finance.

You as in recent times hired finance director have been in contact with some financial institutions. The Matey hire acquire company is willing to supply the Rs1 million of additional equipment the firm needs. Gabriel will have to pay for this over 25 months at a rate of Rs.50, 000 per month with no early deposits.

The Helpful leasing company is prepared to buy the equipment and rent it to Gabriel on a finance lease stretching over the four year useful life of the equipment, with a nominal rent thereafter. The cost of this finance is virtually the same to that for the term loan that is 13 per cent annual percentage rate.

Required-

Write down a report for board of directors explaining the nature of the four forms of finance which can be used to purchase new equipment- hire purchase, leasing, bank term loan and overdraft point out their relative advantages and disadvantages.