Analyzing The Financial Decision Making Sample Assignment
This report is about analyzing the financial decision making of organizations in New Zealand by analyzing and interpreting their financial statements and also analyzing the operating environment of Maori/Iwi organizations.. For this report we have chosen two organizations, one is Maori organization named as Moana New Zealand Ltd which was formerly known as Aotearoa fisheries limited and other is Stanford Ltd. Both companies are two of the biggest companies in New Zealand in seafood and fishing industry. Though both companies are involved in seafood production, major difference lies in the value system on which business operates. While Sanford is more economically driven and wants to be world’s best seafood company, Moana New Zealand vision is to maximise Maori fisheries assets value. This difference arises due the difference in principles as Moana follows maori principles which are discussed in the report.
For analysis purpose, ratio analysis and valuation methods have been used and the results have been compared to industry averages. Both companies’ working capital decisions, capital budgeting decisions have been analyzed and at last difference in both companies’ financial framework has been discussed to analyze Maori organizations’ operating environment.
Financial Statement Analysis
Financial statements are usually prepared to help creditors and investors assess and evaluate the financial framework of a company and use that information in decision making (Mautz, 2006). Some of the techniques that we will be using in this report for our case studies are Ratio Analysis, DuPont analysis and then will be applying some valuation models.
Ratio analysis is that financial statement analysis tool which helps in assessing company’s financial health by focussing on some major aspects such as liquidity, solvency, efficiency and profitability (Nissim, 2001). We have calculated some ratios for both the companies i.e. Stanford Ltd. and Moana New Zealand for the years 2013 to 2017 and then compare their performance with industry averages.
Note: Ratios have been calculated by using data from financial reports of last 5 years.
From the above table, we can make following interpretations:
- Inventory turnover ratio has increased from 14.20 to 16.69 from 2013 to 2017 which indicates improvement in inventory management system as it means inventory is getting sold at an increasing rate.
- Accounts receivable ratio experienced slight decrease from 10.34 to 9.24 which implies delayed process of collecting cash from debtors and leads to longer operating cycle.
- Quick ratio has also declined from 0.56 to 0.35 which is not a good sign for company’s liquidity as it implies Moana might need to borrow funds to pay off its short-term debts as quick assets are lesser that current liabilities.
- Debt to Equity ratio has remained fairly stable during these five years implying stability in capital structure as company is wholly owned by Maori/Iwi people and control shares are owned by Te Ohu Kaimoana (SBC, 2018).
- Gross profit margin ratio has decreased from 26,06% to 20.52% but this is because of reclassification of some expenses from administrative to cost of sales whereas Return on equity has increased from -1.49% to 4.41% implying better utilization of shareholders’ funds.
From the above table, it can be concluded that:
- Stanford’s working capital management system needs improvement as its efficiency ratios such as Inventory turnover and Accounts receivable turnover declined from 11.63 and 9.24 to 9.41 and 7.99 respectively from 2013 to 2017.
- Quick ratio has also declined gradually from 1.48 to 0.59 which is not a good signal for company’s liquidity as general acceptable level of quick ratio is 1:1.
- Debt to equity ratio has remained stable over years implying no change in financial leverage.
- Gross Margin and Return on equity both have increased from 15.81% and 3.68% to 23.49% and 6.51% respectively from 2013 to 2017 implying growth in profitability.
Comparison with industry averages
Following table shows comparison with industry average for both the companies for 2017:
Ratio Analysis for Year 2017
By looking at the table and graph, following conclusions can be drawn:
- Both Moana and Stanford have higher inventory management ratio that industry with Moana having much higher ratio which implies that both companies are having more efficient inventory management process.
- Since receivable ratio for both companies is much lower than industry, it shows both companies need to improve their receivable management system as it impacts their liquidity and efficiency adversely.
- Quick ratio is also lower for both companies as compared to industry which reflects poor working capital management as both companies lack liquidity.
- Both companies have stable debt to equity ratio which is in line with industry average which means both companies are less risky and can utilize this in future to strengthen their capital structure.
- There is not much and significance difference in profitability ratios which shows Moana needs to increase their profitability where Stanford are providing better returns to their shareholders.
Dividend ratio indicates that portion of net income which is paid to shareholders as dividends
A indicated by above table Moana paid around 50% of net income as dividends while Sanford paid 57.37% of net income as dividends.
Valuation is a process of determining an asset’s or a company’s intrinsic value. There are various methods to calculate a company’s share’s fundamental value such as Dividend model, DCF model, relative valuation etc. (Nissim, 2001).
For this report, we will be using comparable valuation approach where two variables will be considered; one is Price to Earnings (P/E) Ratio and second is Price to Cash Flow (P/Cash Flow) Ratio. In comparable valuation approach, company’s valuation ratios such as P/E, EV/EBITDA, P/Sales etc. are compared with industry averages and then their share value is calculated using industry averages (Nissim, 2001).
As we can see in Table 5, Moana’s share value should lie between 1040.18 NZD and 1162.53 NZD as per relative valuation approach whereas Sanford share value is between 6.04 NZD and $7.21 NZD
Current Market price of Sanford share is 7.76 NZD which is greater than its intrinsic value.
As per P/Cash flow variable 7.21< 7.76
As per P/E variable 6.04 < 7.76
It implies that Sanford is overvalued in the market and investors can short sell shares to earn profit.
Financial Decision Analysis
Analysis of financial decisions of both companies will be done by evaluating their inventory, receivable and payable methods.
There are various methods to value a company’s inventory including FIFO, LIFO and Weighted average costing method. Choice of method has significant impact on company’s liquidity and profitability as various methods result into different ending inventory and Cost of Goods Sold (Herath, 2018).
By analyzing both companies’ financial statements, it was found that both companies use weighted average costing method and state their inventory at net realisable value or cost whichever is lower (Sanford, 2017) (Zealand, 2017).
Weighted average cost method results in higher COGS and Lower ending inventory which results in higher inventory turnover ratio and lower profitability ratios which is evident from ratio analysis performed for both companies.
As inferred from Ration analysis performed in previous section, both companies have a very low receivable turnover ratio as compared to industry which implies inefficiency in receivable management system.
Moana records its receivables at fair value and establish provision for bad debts periodically when there is evidence of such occurrence whereas Sanford determine allowance of doubtful debts by evaluating line by line items..
Both companies need to increase their collection period to improve their receivable management. They can use factoring and early settlement discount schemes for the same
Payables management include management of trade payables which includes amount company owes to its vendors. It is also an important component for working capital management as companies needs to analyze their terms of credit to forecast their needs for short term funds.
Both Moana and Stanford recognized trade payables at fair value and then measure them at amortized cost.
Maori/Iwi organizations Environment Analysis
Maori organizations driven by Treaty of Waitangi have shown accelerated growth in past few decades. Many Maori organizations fulfil various other purposes than just making profit. As mostly maori organizations are owned by maori people i.e. majority of their shares are owned by maori people, they give more importance to cultural and social aspirations of their owners (Cultural and values/ Maori Business, 2013).
Their core value is to protect and uplift their community’s interest. Maori organizations work on Te Kaupapa pakihi fundamentals which include:
- Putake: It means the origin or reason for being. Though maori organizations come into existence for the same reason as other organizations i.e. profit making, they emphasize on ‘multiple bottom line’ where cultural, social, spiritual and economic goals are stated in annual reports and mission statements alongwith profit making objectives.
- Turanga: It means positioning. Maori organizations formed by collectively owned resources may be subject to specific laws for example, in setting up an organization, if land is core asset, that land will not be sold for either tikanga or legal reasons.
- Maori diversity
- Maori unity
- Self determination, control and ownership
- An ethic of belonging, kinship
- Guardianship of natural resources
- Generosity, hospitality, care and giving
- Cross-sectoral alignment
- The best possible return is sought on integrated goals
- Multiple responsibilities and acoountability.
Legal Environment: Maori organizations are subject to same legal framework as other organizations of New Zealand which includes Companies Act 1993, Consumer Guarantees Act 1993, Income tax act 2007 etc. Apart from this, these organizations are also governed by special governing bodies which are set up for maori organizations. For example Moana New Zealand is governed by Te Ohu Kaimoana, a body set up by the government to protect Maori interest in the marine environment (2608 Identify legal structures, taxation, and income distribution for Mori organisations, 2017). Taxation system for maori organizations is also similar to other organizations which includes Income tax, GST, Fringe benefit tax etc.
Accounting standards and Reporting system: Maori organizations compliance requirements are same as of other organizations of New Zealand. Their financial statements are prepared with generally accepted accounting practice (GAAP) and comply with NZ IFRS i.e. New Zealand equivalent to International Financial Reporting Standards.
Therefore it can be concluded that financial considerations for Iwi/ Maori organizations are almost similar except the fact that their decisions are primarily driven by their culture and value system instead of economic considerations as they give more value to sustainability and environmental factors.
2608 Identify legal structures, taxation, and income distribution for Mori organisations . (2017). Retrieved September 17, 2018, from NZQA: https://www.nzqa.govt.nz/nqfdocs/units/pdf/2608.pdf
Cultural and values/ Maori Business . (2013, August 9). Retrieved September 17, 2018, from SeniorSecondary: http://seniorsecondary.tki.org.nz/Social-sciences/Business-studies/Maori-business/Culture-and-values
Herath, H. S. (2018). Inference of economic truth from financial statements for detecting earnings management: Inventory costing methods from an information economics perspective. Managerial and Decision Economics, 39 (4), 389-402. Retrieved September 17, 2018
Mautz, R. D. (2006). Understanding the basics of financial statement analysis. Commercial Lending Review, 21 (5), 27-34.
Nissim, D. &. (2001, March). Ratio analysis and equity valuation: From research to practice. Review of Accounting Studies, 6 (1), 109. Retrieved September 15, 2018
Sanford. (2017). Sanford Annual Report 2017. Sanford Limited. Retrieved Setember 17, 2018, from file:///E:/Research%20Pixie/Sanford-2017-Annual-Report.pdf
Sanford Ltd (SAN.NZ) financials . (2018, September 17). Retrieved September 17, 2018, from Reuters: https://www.reuters.com/finance/stocks/financial-highlights/SAN.NZ
SBC. (2018, September 15). Moana New Zealand- SBC . Retrieved September 15, 2018, from Sbc: http://www.sbc.org.nz/our-members/sbc-members/moana
Zealand, M. N. (2017). Moana Annual Report 2017. Moana New Zealand Limited. Retrieved September 17, 2018, from https://moana.co.nz/wp-content/uploads/2018/03/Moana-Annual-Report-2017_web.pdf
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- 1.Evaluation of financial performance
Implications of investment in the company, 3. potential acquisition.
The study focuses primarily on the review of future goals of the organization, as another organization would eventually have to be purchased. The ratio analyses for the past five years have been used to assess the financial health of a selected organization. Marks & spencer Group PLC is a luxury fashion house in London, England which is selected in this report for research. Various investment assessment technologieshas also been taken into account in identifying areas where investment can be made and analyzed in the same. The final segment of the study illustrates how another company can be acquired. Throughout 2019, the company produced sales of £2720.2 million. The data from 2019 indicate that 9862 employees work to satisfy worldwide customers' ideal fashion requirements and give the best outcomes in the world for better success.
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1.Evaluation of financial performance
To evaluate the proper analysis of their financial positions, each company must also take a close look at its financial structure. The PLC analysis by the Marks & spencer Group was performed in several ways, to analyze the overall structure and future actions for growth and investment accordingly. The financial ratio restricts the use of historical information and makes the future difficult to forecast. This may lead to misinterpretation or research findings because the seasonal impact is not addressed (Platonova, et. al., 2018).
This ratio is used by management to identified profitability of company and recognises financial performance of organisation. Profitability ratio help management to identified major issues which can be hurdles in earning profit or margin for the year. Hair loss 5 year financial performance is evaluated through operating ratio which helps management to identify profitable trend to make decision which helps management in expansion projects.
These ratios are helpful not only to measure the company's financial viability but to compare the company with the other markets. The five-year comparison shows the actual organizational pattern throughout the period (Erin, et. al., 2018).
The above table shows that the profitability of the Marks & spencer Group has varied over the years. The fluctuations, however, are different in both size and direction. The operating profit margin of the enterprise decreased from 2015 to 2016 and 2017, i.e., by 17.4% at the previous rate, to 16% and, consecutively, by 14.2%, thereby increasing fixed costs in that period and increasing the number of taxes payable by the enterprise.But there has been a profit increase since 2018, as the ratio increased to 15% and 16.1% in 2019. Consequently, the increase in the operating profit ratio will make the investment less financially risky (Cristóbal, et. al., 2018).
The organization's liquidity performance was very strong. The quick enterprise ratio exceeds 1 in all 5 years, indicating that the organizational level is free. The Company can sell all its new debts and recover existing debt from existing assets without the selling of stocks via current assets (Rashid, 2018).
The table shows that the rapid ratio increased by 1.5-2 and slightly decreased by 2015-18 in 2019, with an impact on the performance of the organization. This rise reflects the boost in liquidity and allows the Company to invest a large amount of cash to produce future sales, secure bonuses, and essentially the fiscal situation (Rashid, 2018).
This ratio can be measured for the organization's ability to use its assets to produce profits. The business has seen a steady increase in the use of assets over time (Brambilla, et. al., 2018).
Pragmatic was the reduction of the asset Ratio of sales between 0.85 and 0.79 in 2015 and 2016, which showed that fixed assets were not effectively utilized, but that the increase was noted in 2017. This increase could be due to aggressive payment policies and debts that could impede the margins of the organization. In this strategy, Marks & spencer is assisted to a minimum by only obtaining a few transitional overdrafts and then using his skills as an equity finance expert. This is a delay as a result of reduced asset payments, particularly property and commercial claims, and increased risks, particularly commercial payables (Minetto, et. al., 2018).
Financial Gearing Ratio:
The ratio of transactions compares a kind of ownership with the company's debts or loans. The gearing ratio is the financial ratio. Gearing is a measure of the financial strength of the company, which indicates the degree to which shareholders' funds are financed in comparison to borrower funds through their operations. The gearing ratio is a financial leverage calculation to indicate the extent to which share capital and debt financing finance operations of a company. This ratio helps to determine how long-lasting the company's solvency supports long-term debts (Kiarie, et. al., 2019).
The Marks & spencer ratio has declined over the years and it seems that the organization's funding has been fully funded rather than debt because the cash flow is not stable.
Comparison of Marks & spencer & Ralph Lauren
(Chowdhury, et. al., 2017, pp.1519-1534)
The rival of Ralph Lauren is Marks & spencer Group Plc. It is therefore obvious that Marks & spencer Group Plc.’s performance is better at comparing the two companies' achievements (Valogo, et. al., 2018).
The implications are the risk-considering approach to capital planning and its effect on risk are crucial to the efficiency evaluation or any speculation option. The danger is a state of risk where future outcomes have unintended consequences or a major misfortune. Uncertainty is a necessity without any doubt to communicate the impact of actions and choices. An evaluation of the risk of the decision is made using the likelihood of vulnerability (Warren & Seal, 2018).
An association can agree on development promotion and theory in particular. In these circumstances, the association should decide on the comparable easement of the NPV procedure and pedestal. The net present value is used to investigate the profitability of rendering or assumption. The distinction between close views on cash inflows and the judgment on cash outflows is controlled on several occasions.They must limit them to agree on the current profit outlook at a certain pace. A theory for the event at a comparable risk or expense will be used to solve the temperament. At the moment, NPV is taking liquidity. The example of money shows only that the rupee today adds significance to tomorrow (Marchioni&Magni, 2018).
The internal rate of return ( IRR) is a discount load that reduces the value of the grid to 0 (NPV). Finally, the typical complex annual rapidity of the review can gain an effort or a hypothesis. It is a theoretical framework that helps to predict meetings upside down. It has been shown that the initiative's affiliation figure was 12%, while the real blue calculation shows that it is reflected by cash inflows (Du, et. al., 2018). It has to be said, therefore, that Marks & spencer Group Plc. should establish this company in the event of everything happening, because the normal return is more than expected and benefits the company in the future and helps the company to enter the real market better (Du, et. al., 2018).
Calculation of NPV and IRR:
IRR – 52%
Both NPV and IRR procedures depend on Lifestyle proportion and wages. The protocol to manage wages and spending in cash with the aggregation site is typically unlike that which takes place in cash inflow and outflows. A scheme can be recorded in solitary times and the era of outlooks cash is collected (Drechsler, et. al., 2018). Costs can occur in one step, and ready money is paid in an era of perspective.The leaders generally make NPV and IRR estimates by using revenue time. Just as an entity positions a development into an asset, for example, overflowing notes are connected to the NPV and IRR reviews. The total reduction in target intervals does not constitute compensation and is excluded from NPV and IRR measurement. The coins gain, however (many times referred to as a lowering charge protector) is associated with cheapening, because the cost of record disintegration decreases the estimates charged individually (English, et. al., 2018).
A sensitivity analysis describes how various values for a particular variable under some set of assumptions affect a specific variable. Sensitivity analyses will then analyze how different sources of vulnerability lead to general process instability in a mathematical model. It is used in some limits that depend on or more of an input variable. In the business and economic fields the sensitivity analysis is used. It also serves as a "What if" survey for financial analysts and economists (Kami?ski, et. al., 2018).
The choice of a company often depends more on how it is chosen than on the number of NPV. Fund managers at Marks & spencer Luxury should investigate the impact so that they can understand the innate risk of the tasks and how hazards can be identified or mitigated during project implementation (Mukhametzyanov&Pamucar, 2018). The impact assessment helps –
- The effect that will income of the undertaking.Detection of Initial Cash Outlay (ICO) Vulnerabilities. ICO's have a few distinct components regularly, for instance, property, hardware, building, and other equipment.
- The impacts of various tax collection guidelines for a multi-year overflow.
- Understanding the hazards related to the task.
- The main parts of the tasks to be performed, refined, and repaid for uninterrupted transportation of anticipated income as this will directly impact the company's income (Hamdia, et. al., 2018).
The rationale for choosing Target Company:
There are many reasons why the association selected is suitable for securing purposes. This is London is one of the key reasons for enhanced assessment of deals for the unique bookkeeping schedule, with its packs and design. The group closed in the year with 837 million pounds of muscular cash, a 150 million pounds bid, and 171 million pounds of advantages the previous day. Therefore the Bureau introduced an expansion of 3 percent to 42.5p, for the full benefit, according to our complex benefits course of action, to achieve uncovered compensation of 52 percent per dividend point. The explanation for these policy interventions is that if a business has a competitive advantage, such as low cost and more effective operation, the needs of a target market can be better met. An economical business can supply the same product as a competitor at lower prices or can deliver a better product at the same cost.This represents the management’s confidence in the success of the company later on. Marks & spencer has a remarkable business, which does not matter. In this way, we know about the changes implemented by the corporate hegemony structures of 2018 and aim to educate our clients, not least of their cause, of all of the additional elements, honestly and entirely. Also, they develop systematic and simple methods to ensure that there is a meaningful two-way conversation between their employees and the forest. Also, they grow.
The synergistic gain of the acquisition of the company:
This success is an intentionally important achievement and a declaration of desire. It will focus on the Marks & spencer calfskin product, covering all prototyping, product progress, construction, and creative coordination. The scheme comprises equipment and stock. The defense of their supply chains is being carried out by more and more luxurious companies, such as Hermes and Gucci. As a result, quality, cost, transportation, and sustainability are also more prominent.The task is for the company to accelerate the current medium?term program, to reinforce the lavish pyramid. Fusions will provide the opportunity for relations to create a universal business without colossal hard work. Or perhaps purchasers buy high-cost competing companies which are regularly indirect as a level of the merger. An industry can spend a large number of its shippers or suppliers lonely elsewhere. But the vendor had a ton on its overhead edges earlier by enterprising a supplier known as a perpendicular combination. Any participation in another dealer gives them the ability to move equipment at a small rate. Typically, little participation is achieved and give results on the same.
Proposed deal value and finance of acquisition:
A deal with Marks & spencer would provide a market meeting incentive of over £ 20 billion. Fusion is going to push certain extravagant brands to ask whether scales must be included. The pressure on the companies to change revenues will be increased as a means to boost profit. Marks & spencer is not obligated and therefore can be cautious and sensitive to the organizations' growth, as the market value for this company is valued at £6.2 billion (about $7.9 million). Furthermore, a merger could create the same number of problems as one organization would resolve.
Talks are currently not dynamic and must not be changed shortly after Marks & spencer’s greatest adversary. In the previous period, the total revenue of £742.9 million grew to £715.5 million and was mainly up 4% or 3%. 'Simple' figures are acclimated so they reject the acquisition’s budgetary impact, the retail effects of Marks & spencer’s share in the Spanish market, and the effects of adjustments between remote cash conversions. The sale resulted in a change from the Marks & spencer’s Discount Site to the supermarket channel. The cash-related effects of the applicable organizations are excluded from all notification periods when determining fundamental execution.
The implication of acquisition on firm’s performance:
The main stage is to help promote the picture, the dissemination, and at the same time developing the new offering of our products to the new location. Revenues amounted to £ 2.7 billion, levels were detailed and the CER was 2 percent up, without a nice discount.
- The shown labor income was 437 million pounds, up 7%.
- The profit from work was balanced to £438 million, unchanged in the CER.
- EPS weakened earnings by 81.7p, up 19 percent.
- EPS was 82.1p balanced, 7% higher than CER.
The findings indicate that acquisitions impact the development of organizations and that organizations are growing at a slower rate than maturity by in-speculation. This also has a more and more positive effect on the performance of the company, as productivity figures.There are already hypotheses that associations continue to enter into a specific kind of souk, a specific type in which the association now operates, for a variety of reasons, to establish synergistic reserve links between enterprises which meet similar obstacles to accessing different situations of economics between various companies that affect themselves equally. Also, a merger can decline genuine issues and helps to the behavior of the contestants, who are both a true environment for the acquirer.
Challenges and risk assessment of the acquisition:
A few risk assessments are carried out by the Associ ation following Protection the Marks & spencer Group plc. Many saw differences in identity and are the most prominent clarification behind the mistake infusions and acquisitions. Agents are of the inner nature of a relationship and if there is no merger, they are forced to break into pieces. Therefore, the similarities of the two organizations should be tested before the merger.
Moreover, laws and rules were to be adopted by associations during fusion and mergers. This failure may lead to lawful exercises for supervisory bodies. For delegates, they want to vote on the pay and time rules. Previous arraignment data should be available. Knowledge about the other company's relationship is important because it can affect the company's income. Associations will fill in the correlation holes and allow for every nuance of the pastry, customer base, business nuances, and workforce of each affiliation. This ensures that noineligibility occurs after the fusion and the company is dissatisfied.
It can be concluded from the overall statement that Marks & spencer Group Plc'smonetary health is steady and beneficial, allowing the organization in turn to gain more market shares. In doing so, Marks & spencer's acquisition will also help to increase the company's total revenue to achieve greater company growth. Marks & spencer’s investment in the field of equity budgeting has allowed More revenues to increase the total value of the company for over ten years. To reach higher rates, the prices of Marks & spencer are handled efficiently, so that the company can satisfy its customers in many ways.
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Unit 2 Managing Financial Resources and Decisions Assignment Copy 1
In organisation there are various department and these department get managed by the efficient management team. Among the roles and responsibilities of the management the managing finance resources and decisions is their prime role. Because if they fail to manage their finance they can't survive for a longer time period. In order to understand the things deeply Radisson Plc. is taken into consideration and different measures get covered in this report. Discussion will be made over financial planning, budgeting, and many more in order to manage the financial resources and decisions .
A. Identify the appropriate sources of finance available for the selected business for its operations and assess the implication of different sources.
There are different and numerous appropriate sources of finance available for Radisson plc for arranging their funds in order to expand their business and some of them get discussed below such as:
Implications over the discussed sources of finance such as:
(Trotman, et. al., 2012)
B. Evaluate the appropriate sources of finance for the expansion plan of the above company.
Radisson plc make use of four options in order to render support to their expansion plan such as:
- Leasing: Radisson plc opt the lease option for their capital nature expenditures such as purchasing new equipment. With the use of this option they took required large equipment on lease and make payment of small amount in the form of interest for a set specific period. They utilise their available funds in other activities (Horngren, 2013).
- Retained profit: Radisson plc make use of their save funds while expanding their business. This option didn't create any liability over them and provide adequate support to expansion activities by their own.
- Bank Loan: Radisson plc contact the bank in order to get adequate funds against higher value of security (in the form of fixed assets). They agree to pay interest for the loan period at specified rate such as 4.5%. If they failed to repay loan amount they get declared as bankrupt (Horngren, 2013).
- Equity share: Radisson plc issue ordinary shares in order to arrange funds for expansion purpose. They get huge share of capital but they share their ownership with shareholders. Organisational functioning goes in the hand of board of directors (Horngren, 2013).
A. Analyse the cost of funding the project using equity versus debt finance and recommend your choice.
Cost of funding having three types such as:
- Cost of equity: To arrange funds Radisson plc issue equity share and at the end of year they share earned revenues with them in order to make them satisfy. Dividend payment is considered as the cost of equity as it is paid to the shareholders (Weetman, 2013).
Cost of equity (K e ) = Annual dividend per share (d) / Share price (P 0 )
- Cost of debt: For arranging funds Radisson plc took loan from bank and in return they pay interest on regular basis till they repay their loan amount to bank. Payment of interest amount determined as cost of debt.
Cost of debt (K d ) = 1 - tax rate (T) (Weetman, 2013)
- Cost of opportunity: Radisson plc make use of retained profits in their business expansion plan and if that amount get utilised for different investment purpose and it may provide better rate of returns. These better rate of returns termed as opportunity cost (Weetman, 2013).
B. Explain the importance of financial planning and assess the information needs for financial decision making.
Financial planning: The planning made by Radisson plc in order to make proper utilisation of their finance is denoted as financial planning. There are various benefits associated with the Radisson Plc and according to their business need they adopt suitable financial planning type such as short term, medium term and long term financial planning (Kemp & Waybright, 2013). There are some points discussed as importance of financial planning such as:
- It make estimations or forecast the requirement of financial needs.
- Radisson plc encourage towards saving their funds for emergency purposes or avoid lack of liquidity.
- Helps in getting adequate control over the usage of the available finance.
- It makes them efficient and effective towards achieving their set goals (Kemp & Waybright, 2013).
In the financial decision making different set of information is required which is firmly divided into three parts such as:
- Strategic information: That share of information which is utilise by Radisson plc management for the purpose of preparing their strategies which get firmly followed to meet out their objectives. Their major focus is towards long term objectives and for this purpose they make use of information related to internal aspects as well as external aspects (Kemp & Waybright, 2013).
- Tactical information: That share of information which is utilise by the middle management of Radisson plc as they get the strategies and implement them in their processing so that they attain their set objectives. They make use of adequate information for preparing plans and putting adequate monitoring over activities.
- Operational information: That share of information which is required by the lower management of Radisson plc in order to implement the plan and execute all activities in systematic manner so that their objectives get attained by them in effective manner (Kemp & Waybright, 2013).
C. Explain the impact of suggested financing option on the financial statement.
There is adequate impact put over the financial statement by the suggested financing option such as:
- Statement of cash flows: The inflow of cash get increased as from all three options adequate amount get inflow but along with this there is small outflow of funds also takes place in the form of payment of interest and dividend. There is increase in cash inflow (Freeman & Freeman, 2010).
- Statement of financial position: Radisson plc took loan from bank (that increase cash balance as well as increase their long term liability), issue shares (increases cash balance as well as increase the shareholders funds) and make use of retained profits (decrease retained funds share as well as reduce their liquidity). There is no so much fluctuations are noted down.
- Statement of comprehensive income: Radisson plc didn't earn much with the help of it but with this effect they need to make extra payments in the form of interest and dividend which lower down their overall profit share. It increase their expenditure and decreases their profit amount (Freeman & Freeman, 2010).
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A. Analyse the importance of budgets for variation and make appropriate decisions for Radisson Plc.
Budget: The management report that include systematic procedure of processing different activities in systematic manner along with adequate allocated materials. With the use of this management adequately implement the strategies made by the upper management in order to meet out their set objectives. There are lot many budgets get prepared such as cash budget, sales budget, production budget, material budget and many more (Harrison, et. al., 2010).
Importance of budget get discussed below such as
Budget provide adequate set plan for executing the activities as it make the coordination effective. With the use of budget report they compare their actual performance that helps in evaluating their actual capabilities and identifying loop holes present in their processing. It helps in executing the activities well on time as well as helps in getting set desired outcomes. All the available resources get allocated appropriately and effectively. All activities get controlled effectively and render adequate level of support in attaining favourable results (Harrison, et. al., 2010).
Radisson plc also make use of budget for different purposes such as
They allocate their available resources in effective manner as per their desired outcomes so that they attain their set objectives. They effectively manage their funds and helps in reducing the chances of sure losses. With the use of it they make estimations and forecast the requirements as well as they make evaluation of their actual performance so that they make required changes in it. They put adequate level of control and monitoring over their activities that helps in getting adequate level of growth (Harrison, et. al., 2010).
B. Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the Radisson Plc.
Unit cost: The share of funds that spend by the Radisson plc. in order to prepare final product that get termed as unit cost and it make inclusion of different variants of costs such as variable, fixed, direct and indirect, etc (Miller-Nobles, et. al., 2016). Price: The cost at which product get sold by the Radisson plc and easily paid by the user. Price is the effective combination of the unit cost and profit margin which is easily paid by user and with the sale of product they get adequate revenues. Cost and price are interlinked with each other and there are number of reasons such as: If the prices of product set too low then Radisson plc is not able to recover their incurred cost. On the other hand if they set the product prices too high then it can't afford by every user and in this manner they can't earn adequate profits because their product can't get sold in the desired manner. It is not easy to set the prices as pricing decisions get influences with different factors such as demand, costs, customers and many more. For processing pricing decisions there are various methods such as penetration pricing method, skimming pricing method, cost plus pricing method and many more (Miller-Nobles, et. al., 2016).
Radisson plc evaluate their market need and set the prices with the help of cost plus pricing method as with the use of it they evaluate the market need and set adequate profit margin in it that helps in getting adequate share of profit with their sales (Miller-Nobles, et. al., 2016).
C. Assess the viability of the expansion project using investment appraisal techniques such as the NPV.
Net present value: This technique is followed for the purpose of measuring profitability related to their respective project. For getting profitability information investment amount get deducted from the amount of total present value of cash inflows. If the amount is positive it states profits and vice-versa (Fleay, et. al., 2011). Payback period: This technique is followed for the purpose of measuring recovery time period in which they recover their funds by getting inflows. The time period in which whole invested amount is recovered is denoted as payback period (Fleay, et. al., 2011).
Initial investment for both projects = £46,000
Cash flows are as below:
Calculations are as follows:
NPV calculation for project A:
(Fleay, et. al., 2011)
NPV calculation for project B:
[Note: There are two "Year 4" in both the table it is the scarp value that attained in the fourth year. In order to render detailed information it is mentioned separately]
Calculation of payback period:
Analysis: Project A recover their investment amount in 2.65 years which is lower as compare to Project B as it took 3.12 years. But the share of profits of project A is £7,920 which is much lower than the profitability of Project B as it rendered profit of £9,445. So project B is selected over project A.
A. Discuss the above mentioned financial statements of Radisson Plc.
Financial statements of Radisson plc include such as:
- Statement of comprehensive statement: The statement that provide a summarised overview of the revenues and expenses of the Radisson plc made or earned within a financial year and their operations management utilise this statement in measuring their net income after deducting all their expenditure (Russell, et. al., 2012).
- Statement of financial position: The statement that provide a summarised overview of their total assets (including fixed assets & current assets), short term liabilities, long term liabilities and their equity capital. It helps their management in knowing their financial position in the market.
- Statement of cash flows: The statement that provide a summarised overview of all cash and cash equivalent transactions whether it inflows or outflows. It helps in knowing the utilisation of the liquid funds as well as helps in controlling the unnecessary usage of their liquid funds (Russell, et. al., 2012).
B. Select two different types of companies (one could be Radisson Plc) and compare the formats of financial statements.
Comparisons among two different companies are as follows on the basis of financial statement formats:
C. Interpret the financial statements using appropriate ratios of a public limited company and compare with those of another company.
Ratio description and interpretation
Analysis: It is concluded that B&S Ltd. are more efficient than Radisson Plc in every item whether it is profit earning or maintaining liquidity within the organisation. It is required to make effective level of improvement as both of them are facing liquidity problems as they both fail to maintain adequate liquidity (Barth, 2015).
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Radisson plc effectively make use of their available financial resources with the use of the marketing planning and in case of any requirement they arrange the finance in the adequate ratio of debt and equity. There is adequate impact put by the inflow of funds over their financial assets as some of the assets get increased with this in the same ratio their liabilities get increased. Budget is prepared by the organisation in order to make the effective use of their available finance along with this they get their desired outcomes. There are different types of organisations that perform their activities and follow different set of rules in order to prepare and maintain their financial accounts. In order to analyse their performance internally as well as externally Radisson plc make use of the ratio analysis through which it get to know that they are not able to maintain adequate liquid funds as well as didn't earn adequate level of profits.
Barth, M.E. 2015, "Financial Accounting Research, Practice, and Financial Accountability: FInancial Accounting Research and Practice", Abacus, vol. 51, no. 4, pp. 499-510. Deegan, C.M. 2016, Financial accounting, 8th edn, McGraw-Hill Education (Australia) Pty Ltd, North Ryde, N.S.W. Fleay, D., Poustie, N. & Mroczkowski, N.A. 2011, TAFE accounting: financial accounting applications, 3rd edn, Cengage Learning, South Melbourne, Vic.
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