Accounting and Finance for Decision Making

This document analyzes the impact of financing on business expansion with financial position and performance analysis using ratio analysis. It also discusses the wealth maximization approach, weighted average cost of capital, and ways to use it for evaluating investment projects. The document includes references and a table of ratio analysis.

Running head: ACCOUNTING AND FINANCE FOR DECISION MAKING
Accounting and Finance for Decision Making
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1ACCOUNTING AND FINANCIAL FOR DECISION
Table of Contents
Part A...............................................................................................................................................2
References........................................................................................................................................6

2ACCOUNTING AND FINANCIAL FOR DECISION
Part A
a) The impact of financing for the business expansion can be well compared and analysed
with the help of the financial position and financial performance analysis of the company.
Ratio Analysis is the key analytical tool that can be deployed for the purpose of analysis
of the changes in the company (Setiawan & Amboningtyas, 2018).
 Debt Equity Ratio: The debt equity ratio for the company implies the impact or
the weightage of debt in a company as compared to the equity shareholders of the
company in the financial year. The debt to equity ratio for the company in the
initial year had been around 25%, however with the inclusion of 20 mn finance
the same would be increasing the debt to equity ratio to around 36.5% (Williams
& Dobelman, 2017). The increase in the debt to equity ratio also increases the
financial risk of the company, it was also observed that the weightage of debt was
comparatively much more than the industry level even.
 Interest Coverage Expenses: The interest coverage ratio shows the ability of the
company in paying the interest expenses of the company with the help of
operating income of the company. The ratio is seen to be improving for the
company whereby the increase in the revenue of the company is set to offset the
increase in the finance expenses of the company, The ratio was also lower than
the industry average which is good (Robinson et al., 2015).
 Operational Gearing: The operational gearing ratio for the company is seen to
be increasing from 2.60 times to around 2.42 times allowing the company report
high and sustainable profit.

3ACCOUNTING AND FINANCIAL FOR DECISION
 Return on Equity: The return generated by the company for the equity
shareholders of the company in the current year was around 12.26%, on the other
hand the forecasted Return on Equity is seen to be increasing marginally to
around 12.29% (Boyas & Teeter, 2017). However, it is important to note that the
same is under the industry average which is around 15% thus it can be of concern
for the company.
 Dividend Per Share: Income Earned by the investors of the company with the
help of the total number of shares currently is around 0.28 per share. However
with the undertaking finance investment the expected Dividend Per Share is
expected to increase to about 0.30 per share (Altman et al., 2017). The same when
compared with the industry average is comparatively better.
 Return on Capital Employed: The total return generated by the company
including the total available capital currently amounted to around 15.60% on the
other hand the forecasted return is said to be falling marginally to around 14.98%.
However, it is important to note that the same still remains within the industry
average allowing the company provide adequate returns to the shareholders and
stakeholders of the company. The wealth maximisation approach is justified here
in this where although the return generated by the company would be increasing
on a marginal basis for the company with the proposed investment plan.
Ratio Analysis Formula Current
Forecas
t
Averag
e
1) Debt/Equity Ratio Non-Current Liabilities/Total Shareholder's Equity 25.09% 36.15% 30.00%
2) Interest Coverage Ratio PBIT/Interest Expenses 10.00 7.18 10.00
3) Operational Gearing (Sales - Variable Cost)/PBIT 2.60 2.42 2.00
4) Return on Equity (PAT/Equity) 12.26% 12.29% 15.00%
5) Dividend Per Share Profit Attributable for Dividend/Outstanding Share 0.28 0.30 0.15

4ACCOUNTING AND FINANCIAL FOR DECISION
6) Return on Capital Employed PBIT/(Total Equity + Non-Current Liabilities) 15.60% 14.98% 15.00%
The financial risk of the company would definitely be affected with the increase in the
debt whereby the debt to equity ratio has consistently increased raising the total interest expenses
paid by the company. The financial risk of the company would be consistently high in this case
whereby the debt weightage for the company is currently very high when and as compared to the
industry average and standards.
Shareholder’s Wealth is an important perspective that the company should be considering
in the long term operational outlook for the company whereby the growth of revenue should not
be comprised with the fall in the profitability of the company. It is important that the net profit
generated by the company is consistently adequate such that the shareholder’s wealth is
maximised in the best possible way. The wealth maximisation approach is justified here in this
where although the return generated by the company would be increasing on a marginal basis for
the company with the proposed investment plan. However, it is important to note that the
recommended investment plan would be generating investment return for the companies that
would be comparatively lower than the Industry Average. On the other hand, from the dividend
earned by investors of the company on a per share basis would be offsetting the required rate of
return for the equity shareholders of the company. Thus, it is well important to consider various
aspects and factors that are associated with the wealth maximisation approach for the companies
(Frank & Shen 2016).
b) The weighted average cost of capital for the company can be well referred to the overall
cost of capital for the company in terms of various sources of finance that are available to
the company in the due course of time period. The weighted average cost of capital

5ACCOUNTING AND FINANCIAL FOR DECISION
shows the minimum set of investment return that the company must earn in order to
create wealth or the required profitability for the shareholders of the company (Lee, Lin
& Shin, 2018). The weighted average cost of capital could be better used by companies in
the case of investment projects that have similar set of investment return and risks
associated with the project. The weighted average cost of capital is generally used for the
purpose of evaluating the financial sustainability of the project. The two main ways in
which the company can use the weighted average cost of capital is while:
Evaluation of Project that has the same Amount of Risk: The WACC of the company
can be used in evaluating the financial sustainability of the project when the assessed
project has the same amount of risk as existing projects has for the company. The WACC
sets out as an investment criteria for the purpose of selecting or rejecting an investment
project in the due course of its life period (Sujan et al., 2017). The same can be well
elaborated for companies that are undertaking new projects in specific to their own
operation industry here the WACC can be taken as the appropriate hurdle rate for the
purpose of discounting and evaluation.
Evaluation of Project with Different Risk: The WACC is an appropriate discounting or
investment evaluation benchmark for companies unless and until the project has same
amount of risk as existing project and when the company is having the same capital
structure as it does for its existing project (Harris, 2017).
Overcoming Limitation: The limitations that is generally faced by companies in specific
to WACC is that the discount rate of required rate of return may not be appropriate for
specific or some projects that has a high set of investment returns. Companies can tweak
the WACC by adjusting it according to the risk profile of the investment project that is

6ACCOUNTING AND FINANCIAL FOR DECISION
taken into consideration. On the other hand, companies should always use WACC
according to the current capital structure so that it is well able to better analyse the risk
and return characteristics that is associated with the project.

7ACCOUNTING AND FINANCIAL FOR DECISION
References
Altman, E. I., Iwanicz‐Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial distress
prediction in an international context: A review and empirical analysis of Altman's Z‐
score model. Journal of International Financial Management & Accounting, 28(2), 131-
171.
Boyas, E., & Teeter, R. (2017). Teaching Financial Ratio Analysis using XBRL.
In Developments in Business Simulation and Experiential Learning: Proceedings of the
Annual ABSEL conference (Vol. 44, No. 1).
Frank, M. Z., & Shen, T. (2016). Investment and the weighted average cost of capital. Journal of
Financial Economics, 119(2), 300-315.
Harris, R. S. (2017). A Comparison of the Weighted-Average Cost of Capital and Equity-
Residual Approaches to Valuation. Darden Business Publishing Cases, 1-5.
Lee, P. T. W., Lin, C. W., & Shin, S. H. (2018). Financial performance evaluation of shipping
companies using entropy and grey relation analysis. In Multi-Criteria Decision Making
in Maritime Studies and Logistics (pp. 219-247). Springer, Cham.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial
statement analysis. John Wiley & Sons.
Setiawan, H., & Amboningtyas, D. (2018). FINANCIAL RATIO ANALYSIS FOR
PREDICTING FINANCIAL DISTRESS CONDITIONS (Study on Telecommunication

8ACCOUNTING AND FINANCIAL FOR DECISION
Companies Listed In Indonesia Stock Exchange Period 2010-2016). Journal of
Management, 4(4).
Sujan, M. H. K., Islam, F., Azad, M. J., & Rayhan, S. J. (2017). Financial profitability and
resource use efficiency of boro rice cultivation in some selected area of
Bangladesh. African Journal of Agricultural Research, 12(29), 2404-2411.
Williams, E. E., & Dobelman, J. A. (2017). Financial statement analysis. World Scientific Book
Chapters, 109-169.