Analysis Of Different Sources Of Finance, Financial Statements, And Decision Making In Business

Part A: Payback period

Part A: Payback period

(Brigham and Michael, 2013)

Part B: Weighted Average Cost of Capital (WACC)

Formula of WACC: Weight of Equity * Cost of Equity + Weight of Debt * Cost of Debt

(Damodaran, 2011)

Part C: Net Present Value

Discount rate (WACC)                     6.50%

Formula of NPV: Present value of cash inflows – present value of cash outflows

Part D: Accounting Rate of Return (ARR) of the project           

Average Accounting Income   £18,333.33

Accounting Rate of Return (A)       = Average accounting income /Average Investment         

                                                                        10.78%          

Part E: Recommendation as per managing director requirements

Overall Recommendation: It is highly advised to select the project due to high NPV and High accounting rate of return (Davies and Crawford, 2011).

Answer 2:

Part A:

The two types of business structures that the owner of Xstore can consider along with their advantages and disadvantages are explained below:

Private Limited Company

It is regarded as a separate identity legally that will provide the benefits of both a sole proprietorship and corporation to the owner of the store. It will enable the owner to possess complete control over the ownership structure of the company and the shareholders cannot claim any possession over its property.

Advantages

• The development of a private limited company structure will enable the owners to develop a separate legal entity of their business
• It retains the complete control of the owners and thus does not result in causing the transferring the ownership of the company to the shareholders
• It enables the company to gain access to funds by issuing the debentures and also acquiring funds from the shareholders
• It will also provide the owners who are previously running the business as sole trader to gain tax advantages as the corporation tax is paid on the profits gained and the owners are not liable to pay personal income tax rates (Krantz, 2016)

Disadvantages

• The major drawback of the method used is that establishing a private limited company results in incurring higher cost for the sole traders. This is because the company needs to meet the regulations imposed by the government in order to gain legal existence as a private limited entity
• The decision-making control is lost by the owners as any major decisions need to be taken by involving the major shareholders of an entity
• It leads to increase the legal formalities of owners as the company is required to make fillings regarding taxes, annual returns and conducting meetings

Partnership Firm

It is another form of business formation where two more people agree to share the profit of the business. In partnership firm ownership can be kept with one partner acting for all or can be shared with all partners. Partnership is formed through oral or written agreement between the partners and it give rise to lawful business that has existence in eyes of law. In partnership business, liability of business is shared by the partner in the agreed ratio and if there is no ratio defined that in capital investment ratio. In partnership firm no partner can transfer their share in partnership firm without the consent of all partners.

Advantages:

• It is very easy to form the partnership firm as it is only the contractual agreement between the partners
• Through use of partnership firm there can be more capital investment as there are more persons to make investment
• More persons means more talent, high level of skills and judgment power within the business
• Risk of doing business get distributed in defined ratio
• Partnership firm allow to business in more flexible manner

Disadvantages

• Partnership increase the liability of the partners as in this type of business there is unlimited liability of partners
• More partners mean more distribution of profit. It means profit earned by the business get distributed among more person instead of one (Moles and Kidwekk, 2011)

Part B:

Working capital can be regarded as a part of the overall capital employed by a company and can be stated as the difference between the current assets and liabilities of a company. It can be stated as the daily cash that is required by a company to conduct the regular operational activities. The management of working capital is highly necessary for business entity to ensure that it possess sufficient liquidity base for smooth carrying of daily business operations. Thus, it can be said that working capital management is highly essential for a business entity as it a potential measure that reflects its efficiency, liquidity ad overall financial health.

The inadequate management of the working capital can deter the future financial growth of a business as it can lead to increase in the financial risk of insolvency, liquidation or potential bankruptcy. The development of strategies that ensures maintaining an adequate amount of liquidity for meeting the financial obligation as they become due will help in promoting the goodwill of the company among the investors. It would untimely result in maximizing the returns generated by the company and thus ensuring its continued growth and development (Tian, 2011).

Part B: Weighted Average Cost of Capital (WACC)

The bushiness can adopt the use of aggressive working capital policy in which minima investment is made on current assets. A firm may tend to adopt the use of such a policy if it possess lower level of current assets in proportion to the total assets or is having a higher proportion of short-term debt. The use of such policy can eventually results in gaining higher profitability by a firm by taking higher amount of risk (Afza and Nazir, 2009). 

Answer 3:

Part (i): Calculation of Ratios

Information provided

(Peterson and Fabozzi, 2012)

Part (ii): Financial health of the company from management and shareholder’s point of view

A: Management of the company: Management is mainly concerned liquidity, efficiency, and market value of the company during the period. Liquidity has been measured through application of acid test ratio as it is best method to measure the liquidity position of the company. The acid test ratio of Media Tech Plc was 0.26 times in year 2015 and 0.20 times in year 2016 that clearly shows that company liquidity performance has decreased in year 2016. It means management has fewer resources to pay the short term liabilities as and when it arises.

Efficiency refers to the ability of the management to handle day to day activities like collection of account receivable, payment of account payable and inventory utilization. Day’s receivable outstanding has been increased to 14.48 days in year 2016 to 13.48 days in year 2015 that shows management takes one day extra to collect the account receivable in year 2016 as compare to 2015. Day’s payable outstanding has been increased to 86.92 days in year 2016 from 84.17 days in year 2015 that reflects improved efficiency of management to hold payment of suppliers.

Inventory days outstanding has also been increased in year 2016 that shows company takes more time convert inventory into sales. There was significant decline in P/E ratio in year 2016 that reflects poor market strategy of management that had led to decrease in market price from 1.50 pounds in year 2015 to 0.79 pounds in year 2016. Return on capital employed is also consider important from the management perspective as it shows percentage of return earned on total capital employed by the management in business. There was decline in return on capital employed ratio that reflects poor management performance during year 2016 (Ross, Jaffe and Kakani, 2008).

Shareholders: Shareholders are the true owner’s of the company and they have interest in profitability performance and market return of their investment in company. It has been seen from the return on shareholder’s investment ratio that return has been reduced from 7.13 % I year 2015 to 6.75 % in year 2016. It has been seen from the gross margin ratio and operating margin ratio that profitability performance has been improved in year 2016.

There was 20% increase in earnings per share and 7% increase dividend per share that shows profitability has been increased in year 2016 as compared to year 2015. Due to decrease in market value per share dividend yield was increased but on the other hand dividend payout ratio was decreased. So overall it can be said that profitability performance of the company has increased in year 2016 but market performance has declined (Davies and Crawford, 2011).

Part C: Net Present Value

Answer 4:

Part A:

Budgetary control is regarded as the management control in which the income and expenses realized are compared with the planned income and spending for assessing whether the financial goals are achieved or not. The differences in the results achieved are used for making important decision regarding improving internal control over the operations of a company. The budgetary control can be regarded as the technique for assisting the managers to have a control over the organizational activities. The process of development of budgets is undertaken by a business entity for providing assistance to the managers to plan, monitor and control the financial performance.

This is because the identification of the deviations in the actual and budgeted performance assists the management to develop plans regarding the future growth that involves establishing goals for achieving the determined targets. The business managers develop strategic decisions for gaining control over the organizational activities to overcome the discrepancies identified so that they does not restrict in achieving the determined objectives.

The process of budget development helps in resource allocation and enables the managers to take remedial action for overcoming the variances identified. The development of clear targets and goals to be achieved by the business managers also helps in providing a clear direction to the employees and thus leads to improvement in their performances (Arnold, 2013).

            Thus, it can be stated that the process of budgeting enables the management to promote coordination between financial and non-financial goals for ultimately developing the strategies that leads in promoting organizational growth. The development of plan for acquiring the resources for achieving company long-term goals can be developed effectively with the use of budgets developed. The plans developed should be monitored regularly for identifying the differences in order to take effective control actions for overcoming the variances. In the context of the above discussion held, it can be rested that budgets are an effective toll to be used by business managers for planning, monitoring and controlling the business performance.

Part B:

It is highly important for developing and preparing the accounting information as per the standard accounting concepts for improving the reliability and validity of the financial outcomes disclosed by businesses for the end-users. The main objective behind the preparation of financial or management accounts by a company is to fairly depict the real economic worth to its stakeholders. The true and fair financial information can be disclosed by an entity with the use of accounting concepts. In this context, the four fundamental accounting concepts can be discussed as follows:

Going Concern

            It can be stated as fundamental principle of accounting which assumes that the company will continue to operate its operations in the future financial period also. The company will continue to use its existing asset base for meeting the financial obligations in the future period also.

Consistency

            The accounting concept of consistency means that a business entity need to follow the same principles of accounting for developing and presentation of financial information from one accounting period to another. This requires for making comparison of the financial information effectively over the consecutive financial years.

Prudence

            This accounting concepts states that business managers need to adopt the use of a cautious view for anticipating the future problems and costs of the business. The accounting concept states that a business need to recognize revenue only when t is actually realized by liabilities should be reported as soon as they are occurred (Weston and Brigham, 2015).

Matching

Matching principle is also regarded as one of the basic accounting concept that should be adopted by the accountants during development of financial statements. The accounting principle requires businesses to direct a company for reporting the expenses incurred on its income statement in the same period as compared to the revenue realized. Thus, the accounting concept requires that a business entity should report the revenues and the associated expenses in the same accounting period for avoiding the occurrence of any issue related to misinterpretation of the financial information.

References

Afza, T., and Nazir, M. S. 2009. Impact of Aggressive Working Capital Management Policy on Firms’ Profitability. The IUP Journal of Applied Finance, 15(8), pp.19-30.

Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.

Brigham, F., and Michael C. 2013. Financial management: Theory & practice. Cengage Learning.

Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.

Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.

Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.

Moles, P.  and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.

Peterson, P,P and Fabozzi,F,J,. 2012. Capital budgeting: theory and practice. John Wiley & sons.

Ross, A., Jaffe, J. and Kakani, R.K. 2008. Corporate Finance. Pearson.

Tian, G. 2011. Managerial Ownership, Capital structure and Firm Value: Evidence from China’s Civilian-run Firms. Australasian Accounting, Business and Finance, 5(3), pp.73-92.

Weston, J.F. and Brigham, E.F., 2015. Managerial finance. Hinsdale, IL: Dryden Press.         

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