Financial Analysis for Corporate Governance, Sources of Finance and Investment Appraisal Techniques
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This article provides an analysis of corporate governance, sources of finance and investment appraisal techniques. It includes a discussion on the principles of good corporate governance, profitability and liquidity ratios, sources of finance for Xporters, and investment appraisal techniques for Project A and Project B.
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Running head: FINANCIAL ANALYSIS Financial Analysis Name of the Student: Name of the University: Author’s Note:
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1 FINANCIAL ANALYSIS Table of Contents Question 1........................................................................................................................................2 Part a............................................................................................................................................2 Part b............................................................................................................................................4 Question 2........................................................................................................................................5 Question 3........................................................................................................................................7 Part a............................................................................................................................................7 Part b............................................................................................................................................8 Question 4......................................................................................................................................10 Part a..........................................................................................................................................10 Part b..........................................................................................................................................11 Reference.......................................................................................................................................12
2 FINANCIAL ANALYSIS Question 1 Part a In general, the corporate accountability is considered with responsibilities and the obligations which provides an explanation and reasons for the conduct and actions of the company. In short sound corporate principles needs to be depicted in form of the understandable and balanced assessment of the financial position of the company along with the prospects. The board is further responsible for assessment of the relevant activities which relates to business risks and internal control systems. A good corporate reporting assumes that board is depicted to maintain and establish transparent and arrangements along with assigning appropriate relationship with the auditor of the company. The board needs to also communicate with the stakeholders for fair and balanced assessment of the purpose which are necessary from the business perspective (Tricker and Tricker 2015). In the corporate report published by Cadbury in he UK in 1991 has been able to outline that the company has followed a good CG system through which business activities controlled and directed in an appropriate manner. A good CG practice needs to be identified as per the key factors underpinning the integrity and efficiency of a particular company. In case of depiction of poor CG practice, the company’s potential may be greatly reduced which can lead to significant nature of difficulty. Some of the other examples from the company’s potential can lead to difficulties in financial activities which may have long term impact and damage the reputation of the organization. A company applying the core principles needs to consider the CG, fairness, responsibility, transparency and accountability which will lead to attract more number of investors and support the financial growth (Barkemeyeret al.2015).
3 FINANCIAL ANALYSIS It needs to be therefore seen that, companies applying the core principles as CG, fairness, responsibility, transparency and accountability are seen with organizations such as Coca Cola Amatil, Shell and British Petroleum. These organizations are seen with articulating the strategy to reinforce the company’s agency model. Moreover, these organizations have also considered the development of the robust planning framework, driven by relevant data and scope-of-work (Beekes, Brown and Zhang 2015). Some of the other reasons for these companies to follow a good CG strategy has been further depicted in terms of the different types of the other actions taken by the companies needs to be depicted as per the continuous effort to scout the agency industry for top talent (Flower 2015). These organizations have not only identify the right agency partner but also maintain the best talent pertaining to the agencies in the business which will led to attract more number of investors and support for the financial growth (Josephet al.2016). These agencies are also seen with the relevant actions required delivering the competitive edge needed to deliver the goals. Some of the other organizations such as Wesfarmers Group has been also able to excel in terms of core principles like engaging workers in a more enthusiastic and productive manner and taking responsibility for attracting fresh talent in the company. There is also seen to be relevant for rewarding the trainees in having a positive impact and appreciation. The companies need to be vulnerable for management to be anonymously figuring out the junior employees and getting to know about the ways the management engages their employees. In this manner the team members are also depicted to be avoid any instance of conflicts rather than providing actual opinion (Ni and Van Wart 2015).
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4 FINANCIAL ANALYSIS Part b The principle of the good governance considers that the stakeholders should be informed on the various activities of the company along with the plans which it intend to execute in the future. Transparency factor is referred with the openness and readiness for providing clear information to the stakeholders and other shareholders. For instance, transparency is associated to the openness and readiness for disclosure of financial performance to be accurate and true in nature. Moreover, the disclosure of information in the matters related to the performance of the organization needs to timely and accurately ensure the inventors has access to the information on theclear,factual,financial,socialandenvironmentalpositionoftheorganization.The companies need to confirm responsibilities and roles of the board and management for providing the shareholders relevant level of accountability. The transparency factor ensures that there is full confidence among the stakeholders for making the appropriate decision making and management process associated to the company (Leipziger 2017). A strong CG ensures that the investors are able to maintain sufficient confidence for supporting further growth in the financial performance. The organizations involved in the implementation of sound corporate success and economic growth. The fairness concept is referred with the equal treatment of the stakeholders. For instance, all the shareholders needs to obtainequal consideration for any shareholding in their belonging.In different countries the fairness aspect of the corporate reporting is protected by the relevant laws. However, it needs to be also seen that the companies also desire to opt for the appropriate shareholder agreement whichisdirectlyassociatedwithincludingextensiveandeffectiveminorityprotection. Moreover, the shareholdersshould be done in a fairness based on the treatment of the stakeholders by considering the opinions of the employees, communities and public officials. It
5 FINANCIAL ANALYSIS needs to be seen that more fairer is the entity for the stakeholders, the more likely it will survive the pressure of the interested parties (Ioannou and Serafeim 2017). The board of directors are also depicted to provide the relevant opportunity which is seen to be depicted as per the different types of the concepts associated to act on behalf of the company. The companies need to therefore accept the various types of the propositions for ensuring that the directors are responsible for monitoring the performance of the company. Moreover, accountability needs to be considered as per the hand in hand with the responsibility factor.Inadditiontothis,theboardofdirectorsarealsoseentoberesponsibilityof accountability pertaining to the way company carries out the responsibilities (De Villiers, Rouse and Kerr 2016). Question 2 Figure 1: (Chart Showing Profitability Ratio and Liquidity Ratio) Source: (Created by the Author)
6 FINANCIAL ANALYSIS Operating profit ratio Net profit ratio Return on assets Return on equity 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% Profitability ratio Primetime Plc Dimetime Plc Figure 2: (Chart Showing Comparison between profitability ratios of both Companies) Source: (Created by the Author) Current ratioQuick ratio 0.00 2.00 4.00 6.00 8.00 10.00 12.00 Liquid ratio Primetime Plc Dimetime Plc Figure 3: (Chart Showing Comparison between Liquidity ratios of both Companies) Source: (Created by the Author)
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7 FINANCIAL ANALYSIS The above table shows that the profitability ratios of the business which are operating profit ratio, net profit ratio, return on assets and return on equity. The gross profit margin of Dimetime Plc which is 52.38% is shown to be more than Primetime Plc which is shown to be 20%. The net profit margin of Dimetime Plc is shown to be better than Primetime Plc which suggest that the financial structure Dimetime Plc is better (Lartey, Antwi and Boadi 2013). The return on assets and equity of the business are considered to be financial indicators for the overall success of the business. Both the estimates are shown to be more for Dimetime Plc in comparison to Primetime Plc. The liquidity ratios of the business show the ability of the business to meet the current obligation of the business (Bolek 2013). The current ratio and quick ratio for Primetime Plc is shown to be 12 which is shown to be more than the estimates shown for Dimetime Plc. Question 3 Part a The business ofXporters can select the following sources of finance for the purpose of funding the activities of the business: Bank Loan: The business of Xporters can take a loan for the purpose of financing the planned expansion of the business. The business can avail for loans from banks in exchange for some collateral securities. As per the anticipation of the business, the amount of external finance which the company needs to raise is shown to be $ 1 million. The bank loan is a smart solution towards financing of a business and the same has the option of being either short term or loan in nature (Lee, Sameen and Cowling 2015). In addition to this, Loan is considered to a be cheap source of finance and the source also
8 FINANCIAL ANALYSIS has tax benefits as the business can get deductions for interest payments which are made towards the loan. Friends: The members of Xporters can also raise funds from friends which can also be considered as loans (Khan 2015). The management can accumulate loans from the friends and other relatives even though they do not play an active role in day to day management of the business. Angel Investors: This reflects a high-profile investor who can invest significant amount of funds in the business in return for a stake holding in the business. The Angel investors basically wants a partnership claim in the business (Ding, Sun and Au 2014). These types of practices are often followed by businesses for the purpose of meeting the financing requirement of the business. Venture Capital: This is one of the popular sources of financing and is quite similar to Angel Investors option. In this option, a group of individuals provides finances for the business and manages the assets of the company (Maula and Murray 2017). Venture Capitalists of the business invests in companies which has a strong financial record or background. Part b Point of DistinctionZero Based BudgetingIncremental Based Budgeting 1.Basefor Budgeting This type of budgeting is done by considering the base to be zero and thebudgetispreparedwithout considering the budgets which is prepared for previous year (Ekanem InthistypeofBudget,the changesaremadetothe budgets which was prepared in previous and the same is used
9 FINANCIAL ANALYSIS 2014).for the current year. 2.Allocationof Resources InthistypeofBudgeting,the maximum resources are allocated to those sources which can generate morerevenueorprofitsforthe business. Thissortofbudgetdoenot give any priority to vital areas of the business and the budget mainlymakeschangesto previousbudgetby incorporatingtheinflation factor in the same. 3.Wasteful Expenses Thisbudgetispreparedbythe businessforthepurposeof ensuringthatthewastageof the business is at minimum Thistypeofbudget incorporates wastage as a part of the budgeting process (Citi 2013). 4.InnovationThistypeofbudgetallowsthe business to bring about innovative practices in the organization. This type of budget does not allow innovation and promotes a conservative mindset.
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10 FINANCIAL ANALYSIS Question 4 Part a YearProject AProject BDiscount rate @ 9%Project A-disc cash flowProject B-disc cash flow 0-45000-450001-45000-45000 121250287500.917419494.7526375.25 224100290500.841720284.9724451.385 324100272500.772218610.0221042.45 441250275000.708429221.519481 42611.2446350.085NPV Non-discounted payback period YearCash inflowsCumulative cash inflowsCash inflowsCumulative cash inflows 0-45000-45000 121250212502875028750 224100453502905057800 324100694502725085050 44125011070027500112550 Non-discounted payback period1.991.56 Project AProject B Payback period YearCash inflowsCumulative cash inflowsCash inflowsCumulative cash inflows 0-45000-45000 119494.752125026375.2526375.25 220284.9739779.7224451.38550826.635 318610.0258389.7421042.4571869.085 429221.587611.241948191350.085 Payback period2.281.76 Project AProject B Accounting rate of returnProject AProject B Annual depreciation1125011250 Average accounting income10652.8111587.52 Accounting rate of return23.67%25.75% The above table shows the various investment appraisal techniques which are applied for the purpose of establishing the viability of a project. The NPV analysis which shows whether a
11 FINANCIAL ANALYSIS project will be generating profits or loss for the business is shown to be favorable for Project B as the NPV of the same is computed to be higher than Project A. The accounting rate of return and payback period which is shown for the project is shown to be higher for Project B in comparison to Project A which is shown to be a favorable sign for the business (Almarri and Blackwell 2014). In addition to this, the discounted Payback period is also shown to be favorable for Project B. This clearly indicates that the business should select Project B as the same is shown to be more profitable than Project A. Part b The main difference between the discounted and non-discounted investment appraisal techniques is the application of the concept of time value of money. In discounted appraisal techniques the concept of time value of money is considered and therefore the techniques are known to reflect accurate results (Hoesli and MacGregor 2014). In case of Non-Discounted Appraisal techniques, the concept of time value of money is not considered and therefore the same is not reflecting the accurate results. The discounted payback period is not used very often as the investment appraisal techniques and the same does not reflect accurate results. The payback period also does not show accurate result even in case of discount rate is considered.
12 FINANCIAL ANALYSIS Reference Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects.Procedia-Social and Behavioral Sciences,119, pp.847-856. Barkemeyer, R., Stringer, L.C., Hollins, J.A. and Josephi, F., 2015. Corporate reporting on solutions to wicked problems: Sustainable land management in the mining sector.Environmental science & policy,48, pp.196-209. Beekes, W., Brown, P. and Zhang, Q., 2015. Corporate governance and the informativeness of disclosures in A ustralia: a re‐examination.Accounting & Finance,55(4), pp.931-963. Bolek, M., 2013. Profitability as a liquidity and risk function basing on the new connect market in Poland.European Scientific Journal, ESJ,9(28). Citi, M., 2013. EU budgetary dynamics: incremental or punctuated equilibrium?.Journal of European Public Policy,20(8), pp.1157-1173. Crowther, D. and Aras, G., 2016. Corporate governance and corporate social responsibility in context. InGlobal perspectives on corporate governance and CSR(pp. 23-64). Routledge. De Villiers, C., Rouse, P. and Kerr, J., 2016. A new conceptual model of influences driving sustainability based on case evidence of the integration of corporate sustainability management control and reporting.Journal of cleaner production,136, pp.78-85. Ding, Z., Sun, S.L. and Au, K., 2014. Angel investors’ selection criteria: A comparative institutional perspective.Asia Pacific Journal of Management,31(3), pp.705-731.
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13 FINANCIAL ANALYSIS Ekanem, E.E., 2014. Zero-based budgeting as a management tool for effective university budget implementation in University of Calabar, Nigeria.European Journal of Business and Social Sciences,2(11), pp.11-19. Flower, J., 2015. The international integrated reporting council: a story of failure.Critical Perspectives on Accounting,27, pp.1-17. Hoesli,M.andMacGregor,B.D.,2014.Propertyinvestment:principlesandpracticeof portfolio management. Routledge. Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting. Joseph, C., Gunawan, J., Sawani, Y., Rahmat, M., Noyem, J.A. and Darus, F., 2016. A comparative study of anti-corruption practice disclosure among Malaysian and Indonesian CorporateSocialResponsibility(CSR)bestpracticecompanies.Journalofcleaner production,112, pp.2896-2906. Khan,S.,2015.ImpactofsourcesoffinanceonthegrowthofSMEs:evidencefrom Pakistan.Decision,42(1), pp.3-10. Lartey,V.C.,Antwi,S.andBoadi,E.K.,2013.Therelationshipbetweenliquidityand profitability of listed banks in Ghana.International Journal of Business and Social Science,4(3). Lee, N., Sameen, H. and Cowling, M., 2015. Access to finance for innovative SMEs since the financial crisis.Research policy,44(2), pp.370-380. Leipziger, D., 2017.The corporate responsibility code book. Routledge.
14 FINANCIAL ANALYSIS Maula, M. and Murray, G., 2017. Corporate venture capital and the creation of US public companies:Theimpactofsourcesofventurecapitalontheperformanceofportfolio companies.Creating value: Winners in the new business environment, pp.161-183. Ni, A. and Van Wart, M., 2015. Corporate Social Responsibility: Doing Well and Doing Good. InBuilding Business-Government Relations(pp. 175-196). Routledge. Tricker, R.B. and Tricker, R.I., 2015.Corporate governance: Principles, policies, and practices. Oxford University Press, USA.