financial management of Madison Plc
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Added on 2020-01-07
financial management of Madison Plc
Added on 2020-01-07
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TABLE OF CONTENTSINTRODUCTION................................................................................................................................11. Different sources of funds, advantage and disadvantage with the recommendation toMadison Plc for planned expansion programme.........................................................................12. Impact of efficient working capital on Madison Plc's cash flow.............................................23. Investment appraisal techniques..............................................................................................34. Explanation of the break-even chart for short-term decision..................................................4Other factors in investing appraisal techniques:..........................................................................55 Ratio Analysis...........................................................................................................................5Conclusion............................................................................................................................................6References............................................................................................................................................8Appendix..............................................................................................................................................9Cash Flow....................................................................................................................................9Net Present Value......................................................................................................................10Internal Rate of Return..............................................................................................................11Ratio Analysis............................................................................................................................12
INTRODUCTIONFinance is the soul for every business organization because any organization cannotsurvive in the market without having sufficient amount of funds (Brealey and et.al, 2012).Moreover not only the acquisition of appropriate funds but also its proper management isnecessary to compete effectively. Present report is based on the financial management ofMadison Plc. It is a public limited company operating in UK from past 10 years. It providesintellectual property to Oil and Gas companies, HR consultants, Marketing companies, Touristcompanies and investment property funds all over the UK. The report will discuss varioussources of finance, investment appraisal tools and break-even analysis to take short-term as wellas long-term investment decisions. Moreover, the report will carry out an analysis of financialperformance of Madison Plc through ratio analysis. It will helps to evaluate and examinebusiness performance and take effective decisions for long term survival.1. Different sources of funds, advantage and disadvantage with the recommendation to MadisonPlc for planned expansion programmePresent scenario stated that Madison Plc is earning good profit by retaining its previousclients. However, in order to capture large market, it is planning to expand its operation and needfunds for this purpose. There are different sources that can be used by Madison Plc that areillustrated below:Borrowings: Madison Plc can acquire funds through financial institutions such as banks.They provides funds for different time duration as per the firm's requirement. Bank providefunds on an implied interest rate. The advantage of using bank loan is it helps to fulfil financialneed for different time duration (Embrechts, Klüppelberg and Mikosch, 2013). Moreover, ithelps to gather large amount of funds for the planned expansion and provide tax benefits also.However, its disadvantage is Madison Plc need to pay regular interest as their finance cost.Henceforth, it impose a fixed financial burden to the organization. Moreover, firm need to keepany of the assets as collateral security against loan taken. If firm fails to meet out its financialobligations than bank has right to sell collateral security and recover funds. Retained earnings: Retained earnings is the available surplus after meet out all theoperational expenditures and dividend payment. It is an internal finance sources and Madison Plccan use its retained earnings for the expansion purpose (Kotz, Kozubowski and Podgorski,2012). Its benefit is this is cost free finance sources as firm will not have to pay any interest or1
other kind of cost on this. However, its disadvantage is excessive ploughing back of returns mayimpair the ability to mitigate any financial urgencies. Furthermore, it will be available to alimited extent. Lease: Lease is the finance source in which Madison Plc can acquire building on lease.Its advantage is firm does not need to purchase assets in cash thus, it will reduce the need of highcapital expenditure (Minsky, 2015). However, on the other hand, Madison Plc need to payregular rental charges to the lessor which includes some interest charges also. Thus, it bring fixedfinancial cost to the Madison Plc. Share capital: Madison Plc can issue share capital in the market and gather large amountof funds. Firms can issue both the preference and equity shares and collect appropriate amount offunds to support its expansion. The advantage is Madison Plc does not need to pay regular returnto the shareholder in terms of dividend (Tirole, 2010). However, its negative point is it diversifyor dilute controlling rights to the shareholders through which they can control business operation.Moreover, no tax benefits will be available to the business on dividend payment.Bank overdraft: Bank provide facility to withdraw larger amount than available balancein the account. Its advantage is it helps to mitigate urgent financial need of Madison Plc while itsdisadvantage is firm will need to pay interest charges on the overdraft taken and bank oftencharges a high rate of interest on this facility (Mandelbrot, 2013). Moreover, it does not providefacility to meet our long term finance requirement. Thus, on the basis of above findings, it can be reported that finance manager of MadisonPlc should gather funds through bank loan. It is because it is earning good profitability hence,will be able to bear fixed financial burden in terms of interest. Moreover, loan interest is anallowable expenditure for tax computation hence, it will reduce tax obligations and enhanceprofitability as well. Furthermore, it does not dilute controlling rights to the lenders hence, thisrights can be fully secured in the hand of owners.2. Impact of efficient working capital on Madison Plc's cash flowMadison Plc will need working capital to support its daily functioning otherwise, it willnot be able to done its operations effectively. For instance, Madison Plc has to pay staff salary,office expenses such as postage, stationery, advertisement, building rent, insurance, utilitiespayment such as electricity bill, telephone charges and so on (Gitman, Juchau and Flanagan,2010). Thus, firm need to efficiently use its capital structure in order to maintain its cash flow. It2
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