Reference no: EM131997965

Gordons plc has an annual turnover of £3 million and a pre-tax profit of £400,000. It is not quoted on a stock exchange and the family owning all the shares has no intention of permitting the sale of shares to outsiders or providing more finance themselves. Like many small and medium-sized firms, Gordons has used retained earnings and a rolled-over overdraft facility to finance expansion. This is no longer seen as adequate, especially now that the bank manager is pushing the firm to move to a term loan as its main source of external finance.

You, as the recently hired finance director, have been in contact with some financial institutions. The Matey hire purchase company is willing to supply the £1 million of additional equipment the firm needs. Gordons will have to pay for this over 25 months at a rate of £50,000 per month with no initial deposit.

The Helpful Leasing Company is willing to buy the equipment and rent it to Gordons 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 identical to that for the term loan, that is, 13 per cent annual percentage rate.

Required. Write a report for the board of directors explaining the nature of the four forms of finance which may be used to purchase the new equipment: hire purchase, leasing, bank term loan and overdraft. Point out their relative advantages and disadvantages. (350 words max – you might want to simple create a table and explain pros and cons)