Unit 2 Managing Financial Resources Assignment

Unit 2 Managing Financial Resources Assignment

Introduction

Telco is the medium sized company who wants to extend its cable business to the further extension. Company is required to make decisions relating to various financing and managing activities for which it would require to make proper analysis that is shown in the report in an effective and efficient manner. Various selection approaches are made by proper analysis that is done by the various techniques like investment appraisal techniques, ratios calculations, weighted average cost of capital and many other techniques associated with it. It also requires to maintain a correct start for the expansion of business strategy and taking corrective actions to select the best project by the NPV and payback period. This assignment is best for the company future success and creditability.

Task 1

a) Identify the sources of finance available to a business (at least 3 long term and 2short-term).

There are different sources of finance for enormous purposes like expenditure of revenue and capital. All these finances are taken into account for either short term or long term purposes.

Short term: Short term sources of finance are the finance that are taken into account for the short period of time in the business. In the business when there are requirement to meet the liability within proper time period that these finances are the best option to seek the opportunity to meet its liability. There are many short tern finance that are explained below-

Bank overdraft:  This type of financial resources helps the business to withdraw a certain amount from the bank even that particular amount do not exist in the account. Only a certain limit can be withdrawn by the business as per there formal relation with bank. Many times problems of sales and cost can create differences but with the overdraft facility it can be overcome.

Debt factoring:  In this business perform the transaction by selling its invoices at discount to the third party so that cash flow of the business may be enhanced.

Long term: When sources of finances are identified and extracted with proper planning and time duration to meet the long term finances of the business. There many sources of finance like retained earnings, loans and share capital.

Retained earnings: In this type of financing business have full control on the finance as well as diminish the tax liability. Opportunity cost is present in it but it is also a less expensive than other source of finance.

Loan: Borrowing are done from the banks by providing the collateral security to them and taken into account within proper time period. Fixed amount is borrowed with the fixed rate of interest that provide help to the business in every aspects.

Share capital: It is investing done by the shareholders in the company’s capital that act as a source of finance in the company. Share capital also differ in the public and private limited company as in private limited company shares are sell to few shareholders only mostly they are the relatives. Another is the public limited company in which shares are sold to the public and they are mostly present on the stock exchange (Caglayan& Demir, 2014).

b) Compare and contrast a rights issue of shares and loan stocks.

Right issue- It is the right given to the existing shareholders to buy the additional securities of the company and if they did not enforce the right then they can easily sell their right to some other person. It is a right through which existing shareholders can acquire ordinary shares from the company in which it already hold the stake.

Loan stock: Loan stockis the stock that is secured as a loan by collateral security from another party. It can be secured or the unsecured is similar to the standard loan. There are convertible loan stock that can be converted into the ordinary shares after the fulfillment of certain conditions and criteria.

Right issue: Right issue shares are sell to the existing shareholders in the form of ordinary shares whereas loan stock are not sold to the existing shareholders but are converted to the ordinary shares only after fulfillment of the conditions as prescribed in the contract. Apart from that right issue of shares required all the procedures that are conducted in the public issue due to which it become a complex procedure as well as the involvement of the stock exchange is also become important consideration. In the loan stock company provide them to the customers and they become the creditors of the company whereas in right issue they become the shareholders of the company. Also right issue can be transferred to the other party but loan stock cannot be transferred to other party. There are risk associated with the fluctuation in the market in the loan stock whereas there no risk associated with the right issues (Serrasqueiro et.al, 2011).

c)  Explain which source of finance in above would be more beneficial for the buildings and noncurrent assets.

In relation to the source of finance for the purpose of building and noncurrent assets the more beneficial source would be loan stock as it is the stock that is being exchanged by the company in a way that no liability arises in the security and guarantee. It is also a better option as the person to whom that is transacted become the creditors of the company and do not have any interest as well as influence over the companies working and business. It would also be preferable by the customer as in the convertible loan stock there is conversion of the stock into the ordinary shares that can beneficial for the customers in all the aspects as they can become the shareholders of the company. In relation to the company, loan stock would be less complicated and company can easily manage this source of finance to the best possible outcome. Loan stock also has less formalities and funds can be raised without any complication. Also there is fluctuation in the demand of shares in the market and company makes agreement for the future and if the share price of the company suffers downfall then company can have benefit over the margin and can retain amount irrespective of the situation circulating in the market (Jana, 2010).

c) Advise the Board of Directors on a source of finance for working capital.

Working capital are the funds that are required to conduct day to day business activities of the company. It is important that working capital be managed by the business in a proper manner as if there are more working capital then it can leads to opportunity cost on the other hand with the low working capital company would have to suffer with the problem of liquidity. There are various sources of finance available that are listed below-

Loan from commercial banks: Funds are borrowed from the commercial banks for the purpose of carrying out the operating activities of the business in an effective manner. Loan can be any form i.e. installment or in lump sum. There is no complex legal formality as all the funds are taken by mortgaging the assets. Bank rate is also considerable for the medium scale business but this process is time consuming that may affect the working of the business.

Trade credit: It is the most used method by the business concern as by this method the payment to the creditors are delayed and payment is made after a time period. In a normal circumstances around 3 to 6 months are given for the trade credit. But trade credit is also depended upon the goodwill of the business concern as well as trade credit limits the opportunity of the trade discount that is available to the business when there are no credit given.

Bill of exchange: The bill of exchange is discounted from the banks by the business concern in relation to obtaining funds for the business. Discounting of bills is used for the purpose of bill time and the banks also earn an amount by charging interest on the discounting of the bills. This is the effective manner for the purpose of working capital as there are very less complexity associated with it but then also dishonored of the bill also plays an important in the relation to the working capital (Jerzmanowski, 2016).

Task 2

a) Advise the Board of Directors which of the three financial plans might best benefit the shareholders using Weighted Average Cost of Capital (WACC) and explain how these financial plans will impact on the financial statements

There are three alternatives for the financial purpose and along with these three alternatives the best alternative is selected by using the WACC. In this scenario company possess £ 5,000,000 of ordinary shares value of £1 per share. Company now wants to extend its business with £ 6,000,000. It can be calculated by WACC is shown below-

Alternative 1

Cost of capital= Ke * (Equity capital/Total capital) + Kd * (Debt capital/Total capital)
Where, Ke= 14% and Kd= 0
Equity capital= Existing equity capital + New shares issued
Equity capital= £ 5,000,000+ £ 6,000,000
Equity capital= £ 11,000,000
Total capital= £ 11, 00,000
So, Cost of capital= 14% * 11,000,000/11,000,000 + 0
Cost of capital= 14%
(Keef et.al, 2012)

Alternative 2

Cost of capital= Ke * (Equity capital/Total capital) + Kd * (Debt capital/Total capital)
Where, Ke= 14% and Kd= 5(1-0.30) %
Existing equity capital = £5,000,000
Total capital= £ 11,000,000 (Existing capital+ New capital issued)
Loan stock = £6,000,000 @5(1-0.30) % (interest)
So, Cost of capital= 14% * (£5,000,000/11,000,000) + 5(1-.30) % * (6,000,000/11,000,000)
Cost of capital= 14% (0.4545) + 5(1-.30) % (0.5454)
Cost of capital=8.27%

Alternative 3

Cost of capital= Ke * (Equity capital/Total capital) + Kd * (Debt capital/Total capital)
Where, Ke= 14% and Kd= 5 (1-0.30) %
Existing equity capital = £5,000,000
New issue of shares = £3,000,000
Total capital= £5,000,000+ £3,000,000+£3,000,000=£11,000,000
Loan stocks = £3,000,000 @ 5(1-.30) % interest rate
So, cost of capital= 14% * (£8,000,000/11,000,000) + 5(1-.30) % * (3,000,000/11,000,000)
Cost of capital= 14% *(0.7272) +5 (1-0.30) % *(0.2727)
Cost of capital= 10.18% + 0.96%
Cost of capital= 11.14%

From all the calculation the best alternative would be alternative2 as it has the least cost of capital so by this alternative there are chances that company would be able to save more amount and there are more chances that profit of the company may exceed that can be benefited to the company. It would be helpful in relation to the financial statement as
In profit and loss account- With the determination of cost of capital for various financial plans, the best plan is selected and can be helpful for the purpose of obtaining profits for the company. The best suited plan is selected that would help in the reducing the cost of the company that can be helpful for the extending the margin of profits that ultimately helps the company to accomplish its task in an effective and efficient manner (Farzinfar, 2012).
In balance sheet- It helps in the proper planning that would be helpful for the Telco company is all respects as by selecting the best combination of equity and debt for the company as WACC the best alternative plan is selected with the correct combination that would be helpful in reducing the cost as well as provide effects to the company’s balance sheet. In the balance sheet the debt and the equity is shown in a proper manner that can be helpful for the betterment of the Telco company as it is cable business that required to extend its premises so by the proper combination of debt and equity in the company the better and effective balance sheet is presented to the shareholders of the company.
In cash flow statement- In the cash flow statement the company would be able to plan all the cash flow whether inflow or the outflow that required proper scrutiny due to the importance of the cash in the company. In the business the cash flow plays an important role and its planning is important for the success of the company. As the inflow cash is put in the financing activities that helps to increase its inflow in an effective manner. Also the cash is shown in the balance sheets that increases the company assets which is good sign for the success of the company as well as its growth in the long run (Tanha & Foroutan, 2013).

b) Given that the Profit before interest and tax (PBIT) of the proposed investment is estimated at £840,000; calculate the company's current earnings per share (EPS).

(Khaledi, 2013)

Number of equity shares= 5,000,000
Earnings per share (EPS) = Profit available to the equity shareholders/ Number of equity shares
EPS= £ 438,000/ 5,000,000
So, EPS= 0.0876

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Task 3

a) Explain the benefits of net present value (NPV) method of appraisal.

Net present value is used to show the difference that exist over the flow of money over the years. It also helps in the determining the time value of money as well as is also important in relation to opportunity cost determination. It determine about the amount that is invested in present scenario for the future cash receipts that is expected to be return in the future situation (Weber, 2014).
There are various benefits associated with the NPV in relation to the investment appraisal that is mentioned below-

• It is effective and useful for the purpose of taking decisions in relation to the projects as when there is negative NPV then those projects can easily be discarded and the projects with the better NPV is taken into consideration.
• All the cash flows are taken into consideration as well as they are scrutinize over the whole life of the assets or projects.
• Time value of money is considered to show the interest towards the cash flows for the business.
• With this use of net present value in relation to the discount there are less chances as well as impact on the long term and very less on the cash flow.
• Cost of capital is taken into account for the future as well as risk associated with the future in relation to the project is also determined so that risk may be reduced and better profits may be extracted by the business.

(b) Use the following investment appraisal techniques to calculate for the Brunei’s investment opportunity.

(c) The payback period.

Payback period is the time that is required for the purpose of obtaining amount that is invested in the projects. It helps in the decision making as the best suited projects is selected by the business which can become helpful for the long run of the business (Ljiljana, K. 2011). It is a type of capital budgeting that avoid time value of money.
Payback period for the Brunei’s investment opportunity is shown below -
Payback period = 3 + [(£24,412,500 - £20,000,000) / £6,750,000]
                        = 3 + [£4,412,500 /£ 6,750,000]
                        = 3.65 years or 3.70 years or 3 years 7 months.
The payback period for the company is 3 years 7 months which shows that cost of the investment can be covered in 3 years 7 months.

(d) The net present value

The net present value is difference between the present values of inflow from the present value of outflow. This difference is the net present value that helps to select the present value that is higher as with this there are chances that project may become effective and the inflow of cash would be more.

Net present value = PV inflow- PV outflow
NPV= £21,329,737.50 - £20,000,000
NPV= £1,329,737.50
Where, PV inflow= £21,329,737.50 and PV outflow= £20,000,000.

(e) Using your answers to par evaluate each investment opportunity and make your recommendation to the Board of Directors.

In the Talk mobile in Indonesia,there would be investment of sum £27,500,000 that would be payback within 2.45 years or 2 years 5 months with net present value is 15.55% where NPV in amount is £4,275,000.
On the other hand, Vocal-phone of Bruneihas an investment of £20,000,000 with the payback period of 3.65 years or 3 years 7 months as well as NPV 6.65% where NPV is amount is £1,329,737.50.
From the above information it can be analysed that Talk mobile in Indonesia is more profitable as this project is more profitable to the company as compared to Vocal-phone of Brunei. This is far better than that as its NPV is higher in relation to the investment made in that concern. Also the payback period of this is less that means that company should work towards this project as cost can be covered within 2 years 5 months which is better than the project of Vocal phone that indicates that talk mobile should be taken into account. So, it is recommended that Talk mobile in Indonesia must be taken into consideration in an effective and efficient manner.

(f) Define the concept of unit cost and explain briefly how they can be calculated.

Unit cost is the expenditure that is incurred by the business to produce or sell a single unit for a goods or the services. There are various types of unit cost like fixed cost, variable cost, direct material cost as well as direct labor cost.
Fixed cost- It is the cost that is spent and does not change with the change in the amount of goods or services whether they being produced or being sold by the business concern. This cost is compulsory for the business to bear irrespective of the activities run in the business. This is calculated by the way of integrating all the cost that would be permanent in the business.
Direct material cost- It is used to calculate about the stock that is already being used in the output also the cost that is required for the future concern. There are two methods to calculate it they are FIFO (First in first out) method and another method is average cost. In the first in first out method, the oldest unit in the production are sold out and the later product is remained in the business. Also the price is also determined as per the next oldest price in the business for the product or services. Another method is the average cost in which continued weighted average method is used for the purpose of its calculation. Every time average stock is calculated when production is made in the business (Chandar et.al, 2013).

G) Discuss what factors should be taken into account by an organization such as Telco when setting prices for their output.

There are many factors that is required to be taken into account by Telco for making pricing decision in the company. These factors are discussed below-
Cost- The cost of the product is required to be determined so that prices of the selling may be determined in an effective manner. It is also important that margin of profit be determined as this margin of profit would help in the performance on the gross profits in the accounts of the business.
Market conditions- It is also important that prices be determined as per the conditions that are prevalent in the market. Prices are set as per the demand in the market of that particular product or services.
Economic conditions- Economic condition of the country is required to be analyze before setting up of the prices of the products and services. It is important that these prices are set as per the conditions that are prevalent in the economy like economy is in crises then the demand and prices are set up at lower than the normal manner (Dogan et.al, 2013).
Customers- The bargaining power possess by the customers is also important to consider while making decisions regarding prices as if the product has the enormous demands and supply is less than the monopoly can be created but if there are no such conditions then company would require to mend their prices as per the bargaining power of customers.

Task 4

a) Comment on the main trends and messages contained within the cash flow.

From the cash budget it can be seen that sales of the company has increased from the past months but in the month June this trend has break and there was reduction in the sales of the company similarly wages, salaries and supplies are increasing that means that these expenses shows the increasing trend on the other hand there is consistency in the expenses of rent, advertising and miscellaneous that leads to the consistent trend in the business (Kraft & Schwartz, 2015). But there is inconsistency in the payment that leads to the negative balance at some point. Apart from that balance in the current situation is negative.
With this cash flow it can easily be analyzed that company has to put extra efforts on the sales department so that sales of the company may be increased that would help in the effective working of the company. Also it is analyzed that expenses of the company has increased over the months that indicates that company expenses has increased but its sales has shown a downfall which required to be improved by the company by the proper sales strategy and planning. It is also important that company makes certain criteria to reduce its cost and better and effective pricing method be taken by the company in an effective manner (Sandell et.al, 2014).

b) Explain why a company may be profitable but run into problems with its liquidity financial planning.

Profitability refers to the availability of profits to the company by analyzing and calculating all the financial statements all the company by appropriate accounting standards in it. When the company makes the investment it always behave in a manner in which it would require to at least earn an amount that cover up its cost in an effective and efficient manner. Also there company would also makes all the efforts so that company may increase its profits in a manner that there margin may also increase that would indicate as a good sign for the company. With the increasing profits company can also able to expand its business effectively (Faulkender et.al, 2012). On the other hand liquidity is the amount that is present as cash in hand by the person or the assets that can easily converted into cash at the time of requirement. If the company do not manages its profits then the problem of liquidity may arise that can affect the problems of meeting demands at the time of requirement. As if company invest all its profits in the fixed assets then the amount of liquidity may be less that may affects the company performance in the long run as it may not able to meet all its demand on time that would affect the reputation of the company. So company is required to manage all its profit in a manner that would help in the better performance of the company and the issue of liquidity may not arise in future. marketing planning is also required proper planning that can become effective in a long run.

c) The needs of different users of the financial statements are very specific. You are required to list 7 users of accounts and clearly assess their need.

There are different needs by the different users for the financial statements that are shown below-

• Employees- It is important for them as they work hard with the motive to attain profits that can be seen in the financial statement as well as employees work with the motive to earn more salary as well as safety in jobs that can become a better abd effective way.
• Management- Management is required to use it with the motive to manage all the work in a manner so that correct strategy may be created in which all the working may be conducted and profits can also be increased in an effective manner.
• Owners- Shareholders are the owners of the company and they analyze the performance of the company by its balance sheets and financial statements and with that statements there are various decisions may be taken by the company.
• Tax department- Tax department scrutinize the accounts of the company in a manner so that company may pay all the tax on time by proper analyzing the accounts.
• Investors- Investors wants to know the financial position of the company as with that knowledge and the trends associated with it investors may be able to make correct decisions regarding the position of the company and then only it make investment decisions associated with it.
• Creditors- By knowing the financial position of the company, creditorsdecide the time period for which it would allow the credit facility to the company. If the position is good then creditors can provide credit facility to the company otherwise they would charge extra amount from it.
• Customers- They are the suppliers that maintain all the working process by supplying all the raw material to them and by knowing the financial position they can manage there working more properly (Yaari et.al, 2016).

Task 5

a) Using a maximum of four financial ratios analyze the profitability and liquidity performance 2014 /15 based upon the financial statements in scenario part e advising Telco whether the takeover for Dot should be considered on a preliminary level before engaging in a costlier appraisal.

(Ferrer& Ferrer, 2011)

It is recommended that Telco must make move towards the taking over of Dot Company that would help it to increase its profitability as well as would increase the chances of profits for the company that would be beneficial for the long run of it (Abed et. Al, 2016).

b) Telco is a medium size company. What are the main differences in the financial statements of sole traders, partnerships and limited companies?

Sole traders: They are the single person who has all the rights associated with the company as is also the exclusive owner of it. They do not possess any separate legal entity as well as is entitled to all the profits as well as loss.

Sole trader financial statements: They make the financial statements to determine there perforce and to evaluate the performance so that better working can be done by them. Profit and loss are maintained so that profitability of the small business may be determined as well as the balance sheet of their business is not complex as basic recording are done in it.

Partnership: When there are two or more persons who works together with the aim of earning profits whether registered or not are partnership type of business (Borhan et.al, 2014).

Partnership financial statements: They make p/l account to distribute profits and losses among the partners as well as evaluate their performance. Balance sheet helps them to show there capital as well as there is no extra complex structure it.

Limited companies: They are registered under the companies act and possess separate legal entity. They also has limited liability and only few persons are the members of it.

Limited companies financial statements: Company balance sheet shows the capital of the company that may be equity as well as preference shares. Its balance sheets are shows to the shareholders at the general meetings. Apart from that profit and loss shows the expenses of the company as well as the profit that is available that can be distributed among the shareholders of the company (Wong& Joshi, 2015).

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Conclusion

The Telco Company has to expand its cable business so it must chose the loan stock over the right issue as well as alternative two must be selected by the WACC calculation that would help the company in the long run. Apart from that company must also chose the talk mobile projects due to its higher NPV and lower payback period and it also required to maintain a better and effective approach towards the trends of cash flow. With its ratios calculation it can be said that company is performing well but require some extra efforts to be more effective and efficient in managing all its resources in an effective manner.

References

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