Financial Analysis for Plaggio Limited Company

This assignment is a case study of Plaggio Limited Company, where the student needs to evaluate the company's financial performance and make recommendations on which tender to accept. The report uses various financial metrics to analyze the company's situation and provide a detailed recommendation for the most beneficial tender.

RUNNING HEAD: Financial management 1 | P a g e
Name of the student
Topic- Financial management
University name-

Financial management 2 | P a g e
Table of Contents
Task-1....................................................................................................................................................3
Introduction...........................................................................................................................................3
Task-2....................................................................................................................................................4
Evaluation technique of investment appraisal........................................................................................4
Evaluation of the Tender-A...........................................................................................................4
Evaluation of the Tender-B............................................................................................................6
Evaluation of the Tender-C............................................................................................................7
Discussion of the Evaluation techniques of investment appraisal..........................................................9
Task-3..................................................................................................................................................12
Discussion of the capital structure.......................................................................................................12
Task-4..................................................................................................................................................12
Discussion of the weighted average cost of capital of Plaggio Limited Company...............................12
Task-5..................................................................................................................................................14
Discussion on the factors that could affect the cost of capital............................................................14
Task-6..................................................................................................................................................15
A critical discussion of the different ways capital can be raised by an organisation............................15
Raising funds in market...................................................................................................................15
Recommendatio...................................................................................................................................16
Conclusion...........................................................................................................................................17
References...........................................................................................................................................18

Financial management 3 | P a g e
Task-1
Introduction
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.

Financial management 4 | P a g e
Task-2
Evaluation technique of investment appraisal
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.
Evaluation of the Tender-A
Computation of the payback period
Computation of the Payback period
Years
Amou
nt(RM
)
Present Value
Factors
Present Value
amount
Cumulative
frequency (RM)
0
-
310000 1 -310000
1 30000 0.892857143 26785.71429 26785.71429
2 50000 0.797193878 39859.69388 66645.40816
3 25000 0.711780248 17794.5062 84439.91436
4 20000 0.635518078 12710.36157 97150.27593
5 15000 0.567426856 8511.402836 105661.6788
Pay Back
period
There is no payback period. Company will have to wait for more years
to pay back its initial investment
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.).
Computation of the average accounting return
Computation of the Average Accounting return
Years Amount Depreciation Real inflow After depreciation
0 310000
1 90000 60000 30000
2 110000 60000 50000
3 85000 60000 25000
4 80000 60000 20000
5 75000 60000 15000
Total cash inflow 140000
Computation of the Average Accounting
return 45%

Financial management 5 | P a g e

Financial management 6 | P a g e
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
Computation of the Net Present Value and IRR
Years Amount Present Value Factors Present Value amount
0 -310000 1.00 -310000
1 30000 0.89 26785.71429
2 50000 0.80 39859.69388
3 25000 0.71 17794.5062
4 20000 0.64 12710.36157
5 15000 0.57 8511.402836
Total cash Inflow 105661.6788
Net Present Value -98676.64248
Internal rate of return -33%
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).

Financial management 7 | P a g e
Evaluation of the Tender-B
Computation of the payback period
Computation of the Payback period
Years
Amoun
t
Present Value
Factors
Present Value
amount
Cumulative
frequency
0
-
280000 1.00 -280000
1 50000 0.89 44642.85714 44642.85714
2 50000 0.80 39859.69388 84502.55102
3 30000 0.71 21353.40743 105855.9585
4 30000 0.64 19065.54235 124921.5008
5 10000 0.57 5674.268557 130595.7694
Pay Back
period
There is no payback period. Company will have to wait for more years to
pay back its initial investment
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
Computation of the Average Accounting return
Years Amount Depreciation Real inflow After depreciation
0 280000
1 100000 50000 50000
2 100000 50000 50000
3 80000 50000 30000
4 80000 50000 30000
5 60000 50000 10000
Total cash inflow 170000
Computation of the Average Accounting
return 61%
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).

Financial management 8 | P a g e
Computation of the Net present value and internal rate of return
Computation of the Net Present Value and IRR
Year
s Amount Present Value Factors Present Value amount
0 -280000 1.00 -280000
1 50000 0.89 44642.85714
2 50000 0.80 39859.69388
3 30000 0.71 21353.40743
4 30000 0.64 19065.54235
5 10000 0.57 5674.268557
Total cash Inflow 130595.7694
Net Present Value -149404.2306
Internal rate of return -26%
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).
Evaluation of the Tender-C
Computation of the payback period
Computation of the Payback period
Years
Amoun
t
Present Value
Factors
Present Value
amount
Cumulative
frequency
0
-
380000 1.00 -380000
1 65000 0.89 58035.71429 58035.71429
2 75000 0.80 59789.54082 117825.2551
3 5000 0.71 3558.901239 121384.1563
4 10000 0.64 6355.180784 127739.3371
Pay Back
period
There is no payback period. Company will have to wait for more years to
pay back its initial investment
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).

Financial management 9 | P a g e
Computation of the average accounting return
Computation of the Average Accounting return
Years Amount Depreciation Real inflow After depreciation
0 380000
1 155000 90000 65000
2 165000 90000 75000
3 95000 90000 5000
4 100000 90000 10000
Total cash inflow 155000
Computation of the Average Accounting return 41%
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).

Financial management 10 | P a g e
Computation of the Net present value and internal rate of return
Computation of the Net Present Value and IRR
Years Amount Present Value Factors Present Value amount
0 -380000 1.00 -380000
1 65000 0.89 58035.71429
2 75000 0.80 59789.54082
3 5000 0.71 3558.901239
4 10000 0.64 6355.180784
Total cash Inflow 127739.3371
Net Present Value -252260.6629
Internal rate of return -44%
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).
Discussion of the Evaluation techniques of investment appraisal
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)
Advantages and disadvantages of selecting the particular project
Particular Advantages Disadvantages
Tender A It will give less loss to an
organization if it is accepted.
However, the Average rate of
return of the company is high
The tender A is reflecting
that There is no payback
period. A company will have
to wait for more years to

Financial management 11 | P a g e
which good indicators. cover its initial investment.
Tender B It is evaluated that Net
present value of company
reflects the negative
outcomes and IRR of a
company is also negative.
However, If tender B is
accepted then a company will
have 45% accounting
average rate of return
(Weygandt, Kimmel and
Kieso, 2015).
It is considered that company
will damage the value of its
investment if it invests its
capital in Tender B.
However, ARR of a company
is positive and Payback
period reflects the negative
outcomes.
Tender C If Tender C is accepted then
Plaggio Limited Company
will have less loss in its
However, the Average rate
of return of the company is
high which good indicators.
It is evaluated that the main
disadvantage is related to
decrease in the value of the
investment. It will reduce the
value of a particular project.

Financial management 12 | P a g e

Financial management 13 | P a g e
Task-3
Discussion of the capital structure
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).
Task-4
Discussion of the weighted average cost of capital of Plaggio Limited Company
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).
Bond Yield Data
Face Value (RM) 1000
Annual Coupon Rate 12.00%
Annual Required Return 12.00%
Years to Maturity 20.0
Years to Call 1.0
Call Premium % 3.00%
Payment Frequency 2
Value of Bond (Rm) 1252

Financial management 14 | P a g e
Computation of the cost of the debt of company
Bond Yield Calculations
Current Yield 8.32% =(B3*B2)/B10
Yield to
Maturity 9.50% =RATE(B5*B8,B3/B8*B2,-B10,B2)*B8
Yield to Call 15.17% =RATE(B6*B8,B3/B8*B2,-B10,B2*(1+B7))*B8
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).
Cost of Debt funding
Cost of debt 9.50%
Tax rate 30.00%
Cost of debt after tax 6.7%
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.
Calculation of Required rate of
return Amount
Risk-free rate (A) 2.5%
Beta (B) 1.6
Market return (RM) 12%
Market Risk premium (C) 10%
Required rate of return [A+(B*C)] 17.70%
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
Capital Amount (€
Million
Cost of
capital
% of
portion WACC
Equity (Angle 393.7 17.70% 30% 5.3%

Financial management 15 | P a g e
investors)
Debt 491 6.65% 70% 4.7%
Total capital 884.7 WACC 9.97%
WACC= W1*cost of equity+ W2+ cost of debt funding=
=9.97%
Task-5
Discussion on the factors that could affect the cost of capital
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
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.

Financial management 16 | P a g e
Task-6
A critical discussion of the different ways capital can be raised by an
organisation
Raising funds in market
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.
Particular Advantages Disadvantages
Equity It helps in easy funding of
the new business.
It reduces the financial
leverage.
It increases the cost of the
capital.
The cost of issue of capital is
higher in case of equity
capital issue.
Debt The debt funding decreases
the overall cost of capital.
The interest payment is
eligible for the tax deduction
purpose. Therefore, available
benefits would be used to
It increases the financial
leverage.
It put a company in danger in
case it has less profitability.

Financial management 17 | P a g e
compute the actual cost of
debt of company (Davenport,
and Short, 2010).
Banks loan Company finds easy to get
the bank loan if it has the
strong brand image.
It becomes cumbersome if a
company does not have
proper documents and files.
Securitisation It provides easy finance and
unblocks the blocked funds.
It reduces the ownership of a
company and may result to
takeover of business
(Dominici, 2009).
Recommendation
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.

Financial management 18 | P a g e
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.

Financial management 19 | P a g e
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 29th November, 2017 from
http://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.

Financial management 20 | P a g e
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.

Financial management 21 | P a g e