Report on Effective Financial Decisions - Clariton Antique
Added on 2020-01-28
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Managing FinancialResources AndDecisions
Table of ContentsINTRODUCTION...........................................................................................................................3TASK 1............................................................................................................................................31.1Identification and explanation of different sources of finance..........................................31.2 Implications for sources of finance..................................................................................41.3 Appropriate sources of finance chosen for the business chosen .....................................5TASK 2............................................................................................................................................62.1 Analysis of various cost of finance..................................................................................62.2 Importance of financial planning......................................................................................72.3 Assessment of information needs of different decision maker........................................72.4 Explanation of impact of finance on financial statement.................................................8TASK 3............................................................................................................................................93.1 Analysis of financial statements and making appropriate decisions................................93.2 Explanation of calculation of unit cost and decision making.........................................103.2 simplification of calculating unit cost and decision formation......................................103.3 evaluation of practicable of the project by the help of unlike techniques.....................11TASK 4..........................................................................................................................................134.1 Discussion of the major monetary declaration...............................................................134.2 compare the appropriate format of the financial statements..........................................164.3 Interpretations Of financial statement............................................................................18CONCLUSION..............................................................................................................................18REFERENCES..............................................................................................................................20
INTRODUCTIONFinancial management deals with the adequate utilization of the finance available in thebusiness entity. Financial decisions in any business entity have direct impact on its sustainability.Thus, every finance manager need to take effective decisions regarding investment, financingand dividend to understand the future viability of the business entity. Here, investment decisionsrefers to decisions require to analyse the feasibility of the various alternatives available tobusiness entity and choose the best option . The long term assets requires the huge investmentthus, any wrong decision could lead to the disaster thus the effective investment decisions arerequired. Similarly financing decisions refers to the effective classification of the various sourcesof the finance i.e. internal finance like retained earnings and external sources like debenture,preference shares and equity shares (Arthur, Cheng and Czernkowski, 2010). This financialdistribution need to be such that degree of risk involved in the borrowed funds should beminimum. Last but not least the finance manager need to also take effective dividend decisionsto distribute the surplus funds available in the organisation after the payment of taxes and fixedinterest to debentures and creditors. The present report is about the Clariton Antique ltd whoneed to take effective financial decisions to ensure the sustainability in the long run. TASK 11.1Identification and explanation of different sources of financeIncorporated businesses are the corporations that have the separate legal entity withdifferent organisation structure whereas unincorporated business are the sole proprietorship orpartnership without any legal position. These are the sole trading organisation that have theirpersonal interest and obligations and are sued if any legal dispute takes place. Whereasincorporated businesses have separate legal entity, thus they the shareholders are the owners of
the entity who invest their hard money in the organisation in the form of equity shares. There aredifferent types of financial sources of limited company which are as follows:Share Capital: Share capital refers to the ordinary shares issued by the company with thenominal value of $1 or 50 cents. The market value of these shares differ from the nominal sharevalue which is mainly decided by the stock market (Bennouna, Meredith and Marchant, 2010 ).The company can be funded through issuing new shares to the existing shareholders or to newshareholders according to the conditions stated in the memorandum and article of association. Ifthe corporation is not listed in the stock market then it can raise the funds through other methodslike offer of sale or prospectus issue. Here, offer of sale means to issue shares and then sell tostock exchange. Debentures: Debentures are the secured or in secured loans that bears the fixed charge ofinterest. Secured debentures have some specific security like land or building (Bodie, 2013). Thecompany is unable to dispose off these assets before realising their liability over of repayment ofthe debenture holders.Bank Loan : Bank Loan is the most simple and easy source of finance which have thefixed interest. It provides short and long term loans to organisations and they set the period thatfor how much period loan is provided.When a banker is asked by a business customer for a loanor overdraft facility, he will consider several factors like purpose, amount, repayment, term andsecurity. 1.2 Implications for sources of financeThis includes the process of the issue of capital from issuing prospectus to call on shares.Prospectus is the document to that allow the provide open invitation to public to buy company,sshares . For this purpose company need to submit one copy of the prospectus to the Securitiesand Exchange Commission before the publication date. Private companies are not legallyimplied to issue the prospectus. This prospectus gives the brief of the organisation details,actions, and the term of issue and investments made by the company. After getting the invitationthe public in large are allowed to apply for the shares by filling the specific form within thespecific period of time. After the prescribed time the company starts the procedure of allotment.The company need to receives the 90% applications as compare to the invitations made(Bradbury, 2011). If the subscription is more than the applications which also called oversubscription the company either refund the application amount or distribute the shares on pro-
rata basis. If the applications are under subscribed the company need to ask for the help with theunderwriters to purchase the specific shares. These underwriters are already contracted to call ofthe shares if under subscribed. The last step is to call off the remaining amount on shares. Forthis 14 day prior notice need to be given. Bank Loan: For long term loan from banks are mainly secured which have the specific security like land and building. This bank loan can be short term, middle term or long term. As per the specified period, the bank need to ask for the project details which consists of financial feasibility of the project which consists of the estimated figures of the sales and profits. The bankpersonnel need to take the details regarding purpose, amount, repayment, term and security. After these details made bank enter into the agreement with the business clients and specifies the term and conditions related to the payment of the interest paid and repayment of the principal amount (Carballo-Penela and Doménech, 2010). Debentures: Issue of debentures takes place through the passing of resolution in the board meeting stating the number of debentures need to be issued, rate of interest, and terms of issue. If the company is listed on stock exchange then the pre notice is need to be given to the shareholders about the same. If the issue amount exceeds 50 Lakhs then the the company need to take pre consent of the Controller of Capital Issues are required. 1.3 Appropriate sources of finance chosen for the business chosen While examine the financial statements and documents of the company find that what aretheir financial resources origin which is utilized by the organisation.Preference shares,debentures, equity shares, long and short term loans etc. are the financial sources which is usedby the Clariton antique Ltd.Equity shares-Equity shares are the owner funds of the company. In this the the shareholdersdoes not get the profit at the end of the year and contains the high risk. The investors areinvesting the funds in this kind of shares. Dividend are paid by the company at the end of theyear if surplus profits are available with organisation. These part can not be redeemed that's whythere is a problem of over capitalization.Retained earning- It is the low-budget informant of financing and use of preserved profit doesnot require any cost (Collier and et. al., 2010)t. It increases the financial position of the companyand give stability to business. This leads to the dissatisfaction of shareholders expectationsbecause profit rate is less and it impact on the business value of shares.
Debentures-It is a kind debt instruments and carry a low risk. Most of the investors areinvesting the amount in this share because at the end of the every financial year they get regularincome. It also does not carry any mortgage amount if company had issue a secured debentures.Bank Loan: Bank Loan is the most simple and easy source of finance which have the fixedinterest. When a banker is asked by a business customer for a loan or overdraft facility, he willconsider several factors like purpose, amount, repayment, term and security. TASK 22.1 Analysis of various cost of financeCost of different sources of finance:-1. Equity shares- Equity shares have the dividend cost which is also known as cost of equity.This cost refers to the price to be paid to the equity shareholders from the surplus earn by theentity. This also facilitates the stock valuation in the business entity. Thus, from the businesspoint of view, Clariton Antique Ltd need to keep in mind the objective of maximising theshareholder value thus it is more beneficial tool which focuses on the investors preferences.There are many methods through which the cost of equity shares can be measured such as priceearning ratio method, dividend yield and realisable yield method (Collins, Hribar and Tian,2014).2. Retained earning - Opportunity cost – Retained earning is one of the mediumof financewhich shows the surplus available after the payment of dividends to the shareholders. Thus, it isthe undistributed amount which the entity has for the investment to be made. Retained earningsare the cost free sources which has no tax and interest liability attached to it. Thus, this source offinance differs from other sources like debt, equity. Retained earning has an opportunity cost.Retained earning cost is just the same as the rate of return of the shareholders . Cost of retainedearning can be measured by the formula: kr = ke(1-t)(1-b)3.Debentures – Debetures are securities of long term in which interest is given to the securedbond holders and the interest is paid on a fixed period interval.The face value of the debenturesis the amount on which the rate of interest is calculated. Interest paid is the payoff to thedebenture owner for the investing in the company ( Cui and Ryan, 2011). Cost of equity is morethan cost of debt. Cost of debentures can be evaluatedwith the help of following formula:
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