Financial Decision of ABC Ltd | Assignment

Added on -2020-02-05

| 14 pages| 4368 words| 129 views

Trusted by 2+ million users,
1000+ happy students everyday

Showing pages 1 to 4 of 14 pages

MANAGING FINANCIALRESOURCES1
Table of ContentsINTRODUCTION ...............................................................................................................................4TASK 1.................................................................................................................................................4AC 1.1 Types of finance sources.....................................................................................................4AC 1.2 Implication of finance sources............................................................................................4AC 1.3 Appropriate source of finance.............................................................................................5TASK 2 ................................................................................................................................................5AC 2.1 Cost of finance sources.......................................................................................................5AC 2.2 Importance of financial planning........................................................................................6AC 2.3 Assess the information need of users..................................................................................6AC 2.4 Impact of finance on financial statements...........................................................................7TASK 3 ................................................................................................................................................7AC 3.1 Analysis of budget and appropriate decisions.....................................................................7AC 3.2 Calculation of unit costs and pricing decisions...................................................................8a) 35% mark-up...............................................................................................................................8b) 25% return on capital employed..................................................................................................8AC 3.3 Project viability test through investment appraisal techniques...........................................9TASK 4...............................................................................................................................................11AC 4.1 Purpose of income statement and balance sheet...............................................................11AC 4.3 Calculation of ratios and interpretation.............................................................................11CONCLUSION..................................................................................................................................12REFERENCES...................................................................................................................................12Index of TablesTable 1: Cash budget of ABC Ltd.......................................................................................................6Table 2: Marketing budget of ABC Ltd................................................................................................7Table 3: Calculation of unit costs.........................................................................................................7Table 4: Calculation of pay back period ..............................................................................................8Table 5: Calculation of Accounting rate of return................................................................................9Table 6: Calculation of Net present value and IRR..............................................................................9Table 7: Calculation of ratios of ABC Ltd..........................................................................................112
INTRODUCTION Looking at the present competitive business environment, financial success plays a veryimportant role for the successful organization. For the present assignment, financial decisions willbe taken for the success of ABC Ltd who supply and installs glazed windows to individual housesand businesses. In the current market, ABC Ltd wishes to take a project to supply and install glazedwindows to a new built compound in North West London. Present project report will helps to gatherappropriate funds from different sources. Moreover, financial planning will assist ABC managementto administrate funds effectively through optimum utilization. In addition, budgeting techniqueswill helps to manage business functioning and avoid shortfall through excess availability of funds.At the end, report will describe different type of financial statements and interpret financialperformance with the helps of ratio analysis method. TASK 1AC 1.1 Types of finance sourcesABC ltd, can acquire finance for its new project from the following sources:Bank Loan: ABC Ltd, can acquire funds from bank loan. Bank provides funds for differentduration at an interest rate which is decided on the basis of loan amount and time period as well(Hollander and Verriest, 2015.). Retained earnings: Retained earnings is the balance of undistributed or reserved profitswhich is retained mainly to mitigate future financial need. ABC Ltd, can use its retained earnings toinvest in new project. Share capital: ABC Ltd, can issue both the equity and ordinary share capital in the marketand generate funds in the form of share capital. Overdraft: Apart from loan, bank also allows businesses to withdraw some high amountthan their available bank balance, called overdraft. ABC ltd, is reputative company who is operatingfrom the last 50 years henceforth, it can use overdraft to mitigate their financial requirement. AC 1.2 Implication of finance sourcesBank Loan: ABC Ltd, has to pay finance costs to obtain loan in the way of periodicallyinterest payments with the repayment of principle amount as well. Moreover, legal implications isABC Ltd, has to provide collateral security to secure their debts (Plumlee and et.al., 2015). Oncontrary to it, loan does not diversify business control to the lenders. However, if ABC Ltd, goes forbankruptcy, than it has to sell its business assets and repay to the lenders.Retained earnings: There is no implication to use retained earnings. But still, ABC Ltd, can3
not use its all of the net earnings because it has to maintain some reserve in the business as per legalrequirement. While, it dilute controlling rights to the equity investors. On contrary, in case of havingloss of all the invested funds than ABC ltd, does not need to pay to the shareholders.Share capital: ABC Ltd, has to pay return to their investors either in the form of dividendand capital appreciation. Moreover, dilution of control exists in this source. Legal implication isABC Ltd, has to fulfil all the legal and regulatory requirement such as prospectus issue and stockexchange regulations (Rasoolpur, 2015). Capital will be repaid after the payment to the creditorsand lenders.Overdraft: ABC Ltd has to pay interest which is comparatively high than loan interest rate.Moreover, it is available to the limited extent and continuous overdraft create an negative image tothe business. It does not transfer controlling rights to the banks.AC 1.3 Appropriate source of financeOn the basis of above evaluation, it can be said that bank loan will be the most appropriatesource due to the following reasons:ABC Ltd, is a well-established company hence, it will has a good reputation and creditposition as well. So that, it can eliminate short-term, medium-term and long-termrequirement from this source.ABC Ltd, can use its operational income to pay their interest obligations on loans.Another benefit is interest payment is a deductible expenses for the tax determination. Thus,it reduce ABC Ltd's tax obligation and enhance revenue as well. It does not dilute controlling rights to the lenders so that management will be highly able toexert their full control on the business operations.In addition to it, ABC Ltd, can also use retained earnings because it is available without anyfinancial costs. TASK 2 AC 2.1 Cost of finance sourcesType of finance sources Costs Bank Loan1.Periodical interest payment is the cost of bank loans which maybe fixed and fluctuate as well (Hollander and Verriest, 2015). Retained earnings It does not involve any financial costs but still, opportunity cost isincluded in this. It means that if ABC Ltd does not invest its retainedprofits for the new project than it can use it in other profit gainingfunction. Share capitalDividend payment on the invested capital is the costs of share capital.4

Found this document preview useful?

You are reading a preview
Upload your documents to download
or
Become a Desklib member to get accesss

Premium

$45

Q&A Library Access

Chat support

12

Document Unlocks

4

Answer Unlocks

Students who viewed this