To What Extent Do You Support the Strategy of Financing Expansion of Goodprice Supermarkets Ltd Through the Use of Retained Profits

Topics: Debt, Finance, Economics Pages: 2 (486 words) Published: February 27, 2013
To what extent do you support the strategy of financing expansion of Goodprice Supermarkets Ltd through the use of retained profits I support this strategy of financing expansion through retained profit as Goodprice has £33 million. Looking at the two proposals for the development of a Goodprice supermarket in Ashton under Ribble, Option A would cost Goodprice £12 million to develop. Option B would cost the Goodprice £3.6 million. Therefore Goodprice has enough retained profit to afford both these options and still be able to save some of its retained profit. This may benefit Goodprice as they could use some of the retained profit to pay off its long term debts which may result net profit increasing as business will not have to pay anymore interest charges from its revenue. Another reason why I support this strategy of financing expansion through retained profit is that Goodprice already relies heavily on debt capital; their gearing ratio in 2009 was 55%. Despite the fact that Goodprice’s gearing ratio has been decreasing steadily from 2004 when it was at 65% to 2009. If Goodprice was to finance their expansion through external sources of finance such as a bank loan this might incur interest charges which may result in the gearing ratio increasing. However there are other strategies that Goodprice could still use to raise finance internally other than retained profit. As Goodprice is still a private limited company there is still an option of flotation where the company could float the shares of a company on the stock exchange. This may benefit the company as they may find investors wanting to buy shares which may mean large sums of money can be raised. The ever decreasing gearing ratio could encourage potential shareholder to the business as their returns may be likely to be higher because of the decreasing amount of interest payments that Goodprice will be paying. However a downside to flotation is that it is expensive as documents have to be produced to...
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