Financial Analysis Tools And Investment Decisions: A Case Study Of Plaggio Limited Company

Financial Analysis Tools

This report emphasizes upon the financial analysis tools and investment .decisions of company. There are several financial analysis tools such as ratio analysis, NPV and IRR to evaluate the particular investment decisions. This report reflects the key understanding on the capital costing and investment appraisal technique of organization. In this report, Plaggio Limited Company has been taken into consideration. This report is prepared on the basis of particular case study and investment decisions of Plaggio Limited Company. In the starting of this report, investment decision to replace the production machinery of Plaggio Limited Company has been taken into consideration. However, NPV and internal rate of return and other appraisal methods have been taken into consideration to evaluate the project proposals.  In addition to this, pay-back period and accounting average rate of return of company. It is evaluated that these financial analysis tools assist in identifying the best possible investment option which company needs to take in its business. In the main body part, capital assets price model has been used to evaluate the cost of equity and cost of debt of the company. It is evaluated that management of company could use this CAPM method and capital budgeting methods to evaluate which tender would bring more benefits to an organization. The main objective of this assignment is to evaluate all the three projects and determine which project would give more benefits to Plaggio Limited Company.

There are several investment appraisal techniques which could be used to evaluate the tenders such as NPV, IRR, Payback period, Average accounting period and profitability index. However, these three tenders have been evaluated by using NPV, IRR, Payback period, average accounting period and profitability index to determine which particular project should be accepted by the management of a company.

Computation of the payback period

The above computation of the payback period has reflected that company will have to wait for more years to cover its initial investment (Bekaert and Hodrick, 2017.).

The average accounting return of company is 45% which may be taken as good indicators for the busienss (Brigham and Ehrhardt, 2013).

Computation of the Net present value and internal rate of return

This computation reflects that if company accept the Tender A then a company will have to face a loss of RM -98676.64248. The internal rate of return of the company is also -33% which reflects the negative indicator for selecting the tender A (Garrett  Hoitash and Prawitt, 2014).

Capital Costing and Investment Appraisal Techniques

Computation of the payback period

The above computation of the payback period has reflected that company will have to wait for more years to cover its initial investment. Therefore, on the basis of payback period, Tender B should not be accepted (Piaggio Limited Company, 2017).

Computation of the average accounting return

The average accounting return of the company is 61%. It shows that company should accept this tender on the basis of average accounting return (Barr and McClellan, 2018).

Computation of the Net present value and internal rate of return

The computation reflects that if company accept the Tender B then company will have to face loss of RM -149404.23. The internal rate of return of the company is reflecting the negative -26%. The Plaggio Ltd should not accept the Tender B (Titman, Keown and Martin, 2017).

Computation of the payback period

It is evaluated that company will have to wait for more years to cover its initial investment. It is considered that by the end of the fourth year, a company will have RM 127739 amount. Therefore, on the basis of payback period, Tender C should not be accepted (Matthew, 2017).

Computation of the average accounting return

The average accounting return of company is 41%. It reflects that company could accept this project on the basis of its average accounting return (Turan, 2015).

Computation of the Net present value and internal rate of return

 The computation reveals that if company accept the Tender B then a company will have to face loss of RM -252260.6. The internal rate of return of the company is -44%. The Plaggio Ltd should not accept the Tender (McKinney, 2015).

It is evaluated that all the three projects have negative net present value and higher pay back period. It is evaluated that Project A has less negative net present value and 45% accounting return. The net present value reflects the difference between present values of cash inflow from the present value of cash outflow. On the other hand, payback period also reflects how much time company will take to cover its cash outflow from the business. The Plaggio Limited Company should not accept any of these tenders. However, Tender 1 is more acceptable as compared to other tenders. If in case, it becomes compulsory to accept any of the tenders then company should accept tender A as it offers more benefits and more return (Kundakchyan and Zulfakarova, 2014)

Evaluation of Tenders

Advantages and disadvantages of selecting the particular project

The capital structure of Piaggio limited Company is determined on the basis of the debt and capital portion of a company. It is evaluated that the capital structure of a company is highly influenced by the cost of the capital and financial leverage of the company. Ideally, each and every company should have 30% debt and 70% equity capital in their capital structure.  The capital structure of Piaggio limited Company has been kept to 30% debt and 70% equity capital to keep the proper balance between financial risk and return of the company. However, the cost of equity capital of a company is high as compared to its debt funding. Nonetheless, the debt portion of the company is low but at the same time, it increases the financial leverage of company (Becker, 2016).

The cost of debt of the Piaggio limited Company is computed on the basis of coupe rate information shared. The cost of debt is computed as 9.50% as a firm has bonds outstanding with 20 years to maturity; 12 per cent annual coupon rate; the face value of RM1, 000; and the current bond price is RM1, 252. It is considered that the cost of debt is very low as compared to Cost of equity of company (Pol, 2016).

Computation of the cost of the debt of company

However, the interest payment is eligible for the tax deduction purpose. Therefore, available benefits would be used to compute the actual cost of debt of company (Cravens and Piercy, 2013).

The cost of debt after tax would be 6.7%.

Computation of firm’s cost of equity and its weighted average cost of capital

Computation of the cost of equity- The cost of equity has been computed by using proper Capital assets pricing model of company.

CAPM= RF- (RM-RF)B

Computation of the weighted average cost of capital of company

Weighted average cost of capital- It is computed on the basis of the portion of the debt and equity funding and their associated cost of funding.

WACC= W1*cost of equity+ W2+ cost of debt funding=

=9.97%

TWO factors that are beyond the control of the company which affects the firm cost of capital

There are several factors which may affect the firm cost of capital. However, there are two main factors which could highly influence the cost of capital of a company.

Current economic condition

Advantages and Disadvantages of Selecting a Tender

It is evaluated that if the current economic condition is not growing then company face a high cost of capital. It becomes costly to raise funds from the banks and other people if the purchasing power parity is low. Nonetheless, if the flow of cash in a market is high then it may result in the reduction in overall cost of capital. However, a company could create the shield against all of its funding by using proper hedge funds.  

Current income tax rates

It is considered that the interest payment is eligible for the tax deduction purpose. Therefore, available benefits would be used to compute the actual cost of debt of a company. If the tax implication is higher, then a company may keep the debt portion high. It will also impact the financial leverage of company (Robinson et al. 2016). Company uses debt funding to take the advantage of tax-deductible expenses as per the tax planning policies. The income tax amount is considered as outflow from the business. Therefore, a company should implement proper tax planning to reduce the tax outflow to the certain level.

It is evaluated that there are several ways which could be used by a company to raise funds from the market (Laudon and Traver, 2013).

An issue of shares- This the most effective method to raise the funds from the market. A company could raise funds from the market by a further public offer and initial public offer. It is the process through which company share its ownership with outsiders for some consideration.

Debt funding- In this process, company issues debentures and bonds in market for raising funds. It is evaluated that company use debentures as the promise to pay a certain amount to the bond holders for the stipulated face value. However, debt funding increases the financial leverage of company (McKinney, 2015).

Banks loan and overdraft- It is processed to raise the funds from the banks and financial institutions. It is evaluated that bank loan could be raised by using proper bank process. Ideally, bank offer loans at the higher interest rate as compared to other options. Therefore, it is determined as end resort for the organization for raising funds.

Securitisation- It is the process through which company coverts its long-term assets into liquid assets. It is done by issue of scriptures and securities by secreting its assets. It helps in raising funds from the market (Dominici, 2009).

However, equity and debts are the best sources of finance to raise the funds in the market.  

After evaluating all the data and commutated information, it could be inferred that Plaggio Limited Company has been running its business effectively. However, all of these three options are not fruitful for the business. It will give the high loss to organization if any of the tenders is selected by the organization. In addition to this, Company should maintain 30% debt capital and 70% equity capital to keep the proper balance in financial leverage and cost of capital of a company. Another issue is related to raise funds from the market. It is inferred that company could use equity share funding process and debt funding process to raise funds from the market. Company should raise more funds from the market by using the debt funding as it will reduce the overall cost of capital of company. In addition to this, it should also use the interest amount as tax-deductible expenses to reduce its cash outflow from the business. Now, in the end, it could be advised that accepting any of these projects may result to the destruction of the business. if possible, a company should continue with its existing business activities. There are some factors which cannot be controlled by a company but by using proper financial analysis and business management these factors could be controlled to the certain level.

Conclusion 

This report is prepared on the basis of particular case study and investment decisions of Plaggio Limited Company. It is evaluated that by using proper financial analysis methods, a company could easily evaluate which tender would be more beneficial for the company. However, it is inferred that company needs to evaluate its non –financial ratios such as economic conditions, employee turnover and financial capacity of a company before accepting the particular tender.  The NPV, Payback period, average accounting return and internal rate of return and other appraisal methods have been taken into consideration to evaluate the project proposals. It is inferred that company should accept the Tender A as if company accept the tender A then it will give less loss to company and increases the overall benefits to an organization at large. The main advantage of selecting the tender 1 would be an installation of the new machines and adopting the new business activities. It will increase the overall outcomes and efficiency of the business.

References

Barr, M.J., and McClellan, G.S., 2018. Budgets and financial management in higher education. John Wiley & Sons.

Becker, E., 2016. Overbooked: The exploding business of travel and tourism. Simon and Schuster.

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.

Brigham, E.F., and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.

Cravens, D.W. and Piercy, N., 2013. Strategic marketing (Vol. 8). Boston, MA: McGraw-Hill Irwin.

Davenport, T.H. and Short, J.E., 2010. The new industrial engineering: information technology and business process redesign.

Dominici, G., 2009. From marketing mix to e-marketing mix: a literature overview and classification.

Garrett, J., Hoitash, R. and Prawitt, D.F., 2014. Trust and financial reporting quality. Journal of Accounting Research, 52(5), pp.1087-1125.

Kundakchyan, R.M., and Zulfakarova, L.F., 2014. Current issues of optimal capital structure based on forecasting financial performance of the company. Life Science Journal, 11(6s), pp.368-371.

Laudon, K.C., and Traver, C.G., 2013. E-commerce. Pearson.

Matthew, B.T., 2017. Financial management in the sports industry. Taylor & Francis.

McKinney, J.B., 2015. Effective financial management in public and non-profit agencies. ABC-CLIO.

Plaggio Limited Company, 2017, annual report, Retrieved on 29^th November, 2017 from https://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_JBH_2016.pdf

Pol, L.G., 2016. EFFECTIVE FUNDRAISING. Advanced Management for Deans, p.115.

Robinson, P., Fallon, P., Cameron, H. and Crotts, J.C. eds., 2016. Operations management in the travel industry. CABI.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.

Turan, S.S., 2015. Financial Innovation-Crowd funding: Friend or Foe?. Procedia-Social and Behavioral Sciences, 195, pp.353-362.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

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