Analyzing C Wire's Financial Health and Investment Appraisal

This case study provides a comprehensive analysis of C Wire, a technology manufacturing company based in Corby, England, focusing on its international finance strategies. The study benchmarks C Wire's financial ratios against a proxy firm, XYZ Ltd, specifically examining working capital ratio and return on capital employed to identify areas for improvement. It calculates C Wire's cost of capital and explores various methods for meeting the company's capital requirements, including retained earnings, debt capital, and equity capital. Furthermore, the case study prepares a spreadsheet model to anticipate the impact of a business case proposal over the next five years, critically analyzing the project using investment appraisal techniques and recommending potential revisions. The analysis aims to provide insights into enhancing C Wire's financial performance and strategic decision-making in the international finance landscape.

International Finance
Coursework

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Benchmark the financial ratios of the C wire against the proxy firm....................................3
Calculate cost of capital of the firm along with examining the way in which it can meet the
capital requirements of the project.........................................................................................5
Prepare a spreadsheet model anticipating the impact of business case proposal over the
coming 5 years. Also, Critically analyse the project with the help of investment appraisal
technique and recommend on the possible and required revision in proposal.......................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
International Finance refers to the study of monetary transactions that takes pace among
different countries. This term focuses on foreign direct investment, exchange rate of currency
and trade among the nations. At present, almost whole is involved in the process of financing at
international level. They are becoming a part of export and import activities which helps them in
growing their business at global level (Zheng and et.al., 2019). The company chosen in this
report is C Wire. It is Corby, England based technology manufacturing company. It was founded
by Ali and Elvira in year 2010 for manufacturing technology that can be used by other producers
to prepare their own goods. The report focuses on the setting a benchmark of financial ratios
keeping in view a proxy organisation. It further estimates the cost of capital through the publicly
available data. It also evaluates the funding requirements of the company for its project. It also
analysis the impact of business proposal on the next 5 year performance along with evaluating its
project through the technique of investment appraisal.
MAIN BODY
Benchmark the financial ratios of the C wire against the proxy firm.
Benchmarking can be defined as a procedure for measuring the performance of various
operations of the business. This helps the business in identifying the areas which are lacking
behind from the desirable figures and ascertaining the reasons for it. It involves the comparison
of actual results with the planned ones. The motive behind the benchmarking technique is to shoe
best practice of handling the tasks in the organisation. It helps the firm in making plans for the
way in which the performance of the company can be improved and the set target of the
company can be achieved (Gan, 2019).
This concept can be used by the firms in setting the target for ratios as well.
Benchmarking the ratios means to set a target for the firm which it has to achieve. These ratios
can be related to the competing firm or the ideal ratio or a figure set by the firm itself. It
motivates the firm in improving its performance so that the desired result can be achieved in time
and with accuracy. Their are generally four types of ratios and they depicts the various types of
performance of the company (Gupta, Jha and Singh, 2021).
Liquidity ratio tells that the firm should be able to repay its current liabilities through
available current assets. Setting a benchmark for this ratio helps the company to maintain a

balance between its short term assets and liabilities so that the company can give competition to
the other firms of that industry. Profitability ratio shows that whether the business is earning
enough profits or not. Setting a proper target for this helps a lot to the companies in earning an
optimum level of profits and achieving proper growth. Through this a firm can boost its
employees to show their best and decrease the expenses of the organisation (Matosović and
Tomšić, 2018).
Solvency ratio helps in identifying that whether the organisation is solvent enough to
satisfy its daily needs and requirement of working capital. This is very important and can be
maintained only if the company knows about the ratios of its competitors. This will help them in
improving its performance. Setting a benchmark will help in setting a target that will help it in
maintaining its turnovers and formulate its money collection and payment policy accordingly.
Debt equity ratios can also be benchmarked as business can set a target to maintain a ratio that
can help in adjusting the capital structure in a way that is cost efficient and can help in retaining
the right if control in its own hands (Deepan, Deepa and Murugananthi, 2019).
XYZ Ltd deals in the same product as manufactured by C wire and is a big competitor of
C wire. Here are the ratios of both the companies which can be set by C wire as its bench mark
for improving its performance.
Ratios C Wire XYZ
Working capital ratio 1.2 1.7
Return on Capital Employed 13.9 15
Working capital ratio is calculated by dividing the current assets of the organisation with
the current liabilities. This ratio can also be called as current ratio. It represents the part of
amount from current assets that is available for the firm to be used as working capital. Normally
for all industries the ratio of 2 is considered best for all organisations but it depends on the
industry to industry. At present, the competitor of C wire which is XYZ is at a ratio of 1.7 which
is more than the firm itself. C wire has the ratio of 1.2. It can set a target of maintaining its
working ratio to 1.7 and can plan its operations accordingly. This will help it in improving its
liquidity condition. This can be done by business by managing the resources of the firm and

increase its cash holdings. Looking at the other side, it can also be done by business by lowering
down is expenses and making payment to the creditors in time. This would reduce their
liabilities. By setting this ratio of 1.7 as a benchmark, the management team and the staff
members would get motivated to achieve the target.
Return on Capital employed is calculated by dividing the net profit of firm before interest
and taxes with the capital employed by it. It represents the return earned by firm through the
capital invested by it. According to the rule of thumb, the ratio of 15% or more is considered to
be good. Normally the higher ratio is always better as it shows the amount of profit earned by it
with the help of available equity. The return earned by C wire is 13.9 which is less the
competing business XYZ by 1.1 %. The ratio of 15% can be set by the business as it is better
than C wire and is also an ideal ratio. This will motivate the firm in raising its capacity and
profitability. Setting a benchmark provides a target to the firm which it has to achieve in a
specified time period. This inbuilt a zeal in the staff and the managers to attain the goal.
Calculate cost of capital of the firm along with examining the way in which it can meet the
capital requirements of the project.
Cost of capital refers to the amount that the firm is required to pay in order to attract
people towards it for raising its capital. It is usually the combination of cost of equity and cost of
debt (Muduli and Das, 2018).
Calculation of cost of capital
Cost of equity (Ke) = 20 %
Cost of debt (Kd) = Rate of interest * (1 – Tax rate)
= 4.6% ( 1 – 19% ) + 5.2% (1 – 19% )
= 4.6% * 81 + 5.2% * 81
= 3.726 + 4.212
= 7.938 %
Total cost = Cost of equity + Cost of debt
= 20 + 7.94
= 27.94 %
weight of Equity = 20 / 27.94 * 100
= 71.58%
weight of Equity = 7.94 / 27.94 * 100

= 28.41%
Cost of Capital = Cost of equity * weight of equity + Cost of debt * Weight of debt
= 20 * 71.58 %+ 27.94 * 28.54%
= 14.31 + 7.97
= 22.28 %
Thus the cost of capital for business at present is 22.28% . This means the firm has to
earn at least 22.28 % for satisfying the shareholders and attracting people to invest in the
business.
Their are many ways through C wire can satisfy the needs of its capital requirement.
 Retained earnings- This is the amount which is held by the business out of the profits
for satisfying its capital need in future. This amount can be used by the business for
making further investment or purchasing some asset. It can also be invested by it in the
mew projects. C wire can use its retained earnings to support the new project to be started
by it. This will help it arranging the funds from its own source and prevents it from the
payment of any kind of interest or dividend that are must in case the funds are arranged
from those format. It is less expensive and cost effective (Tsianikas and et.al., 2020).
 Debt Capital- Companies can avail their funds by borrowing the money as well. They
van take loan from the private lenders or can issue debentures for arranging the capital. It
allows number of investors to become a part of the business by becoming lenders for it.
This mode of arranging cash attracts the payment of interest. The company has to make
fixed amount of payment at a particular time period without fail. Thus, it increases the
level of obligation for the company. But on the other hand, the interest paid on these
loans and debentures are allowed as tax deduction under income tax. Thus it can help the
business in lowering down the amount of tax to be paid by it. Thus, this source can be
used by the firm for arranging the capital. Also, the firm do not have issued any
debenture till now, thus it can arrange its long term capital need through this mode (Lv,
and Yang, 2020).
 Equity capital- It is the most common form of collecting money from the public for
supporting the capital needs of the business. In this, firms issue their equity shares to
people and ask them to purchase their share. The businesses who are listed under stock,
only that firms are allowed to issue these shares. The biggest advantage of this source is

that there is a no compulsory payment of interest on them. Companies pay dividend on
their shares and only in the year of profit. This payment is also paid entity if it desires to
distribute the profit as dividend. If the firm do not want to distribute it and wants to hold
for some purpose, then no one can force them to do so. Normally, the firms sell distribute
the dividend to satisfy its shareholders. Firm can issue shares to general public keeping in
view the existing shareholders do not purchase much shares as it will increase their
holdings to 5%. By this they can claim their right over the business which will in return
reduce their rights over the company (Deeney and et.al., 2021).
 Draw money from other project- It is another method through which the businesses can
make use some amount from its other project for supporting its current offer. This
amount can be withdrawn by business if either there is surplus in that account or the
amount required is not to be used in that project for a specified time period. This method
is normally not used as companies do not like to disturb the budget of their various
already running projects. C Wire should not use it as it is already in slowdown situation
(Oke and Conteh, 2020).
It is recommended that the firm should arrange its capital from the debt or retained
earnings as it is not advisable to issue new shares and let the complete holding of firm slip out
from the hands of the company. This will help the firm in arranging its capital from a source that
can be returned back any time.
Prepare a spreadsheet model anticipating the impact of business case proposal over the coming 5
years. Also, Critically analyse the project with the help of investment appraisal technique
and recommend on the possible and required revision in proposal.
Presently the company is in the position of downfall. It is earning profits but this profit is
less than the amount of income earned by it in previous year by 60%. This is a big issue of
concern. The plan of the firm for starting the new project can be useful for the business in
generating more revenues. The initiation of new project requires more funds that needs to be
arranged by the business in time. Apart from that the company have the opportunity to gain
profits. In next 5 years the firm will be gaining profits except the first year. Due to employment
of capital in first year the business would not be able to generate any profit that year but this does
not mean that the project is not profitable, it earns a constant return in the next years. It will
prove to be very much beneficial for the business as the profits generated by business can help

the firm in coming out of losses. Also the introduction of new system will demand less number
of employees which means the expenditure of the organisation will also reduce to that extent.
Though some cost would be required to train them but this amount is very less as compared to
value saved through redundancy. It will also help in reducing the cost of wastages thus making
the business more efficient (Guthrie, 2019).
For the introduction of AI system, the following capital will be required by the business in
coming 5 years.
Software design and upgrade improvements= £ 0.7 million pa per year.
New computer hardware: £3 million per centre
AI systems: £25 million
Calculation of number of employees
Present number of employees in manufacturing units = 400
Total number of employees to be redundant = 300 employees
Employees left in two units = 100
Increase in staff
 1st year = 112
 2nd and 3rd year = 120
Total employess in firm
 1st year = 112 + 100 = 212
 2nd to 5th year = 120 + 100 = 220
Cash flow statement of the company for the next five years
Particulars 1 year 2 year 3 year 4 year 5 year
Cash Inflows
Revenue 15 30 30 30 30
Savings from
reduction in waste
0.02 0.02 0.02 0.02 0.02
Total cash flows 15.02 30.02 30.02 30.02 30.02

Cash outflow
Software design and
upgrade
improvements
0.7 0.7 0.7 0.7 0.7
New computer
hardware
3
AI systems 25
Training to
employees
0.64 0.0015 0.0015 0.0015 0.0015
Salaries 6.36 9.6 9.6 9.6 9.6
Energy usage 0.05 0.05 0.05 0.05 0.05
Total cash outflow 35.75 10.35 10.35 10.35 10.35
Net cash flow -20.73 19.67 19.67 19.67 19.67
Calculation of NPV
Year Cash flow Discounting value at
22%
NPV value
1 -20.73 0.819 -16.98
2 19.67 0.672 13.22
3 19.67 0.550 10.82
4 19.67 0.451 8.87
5 19.67 0.370 7.28
23.21

Value of NPV = £ 23.21
Analysis: According to the above calculated scenarios, it is recommended that the business
should invest in this project as it is a viable source of income for the business in long run. From
the above analysis it can be seen that the cash flows of the business are upto the margin, even
though there have been unfavourable NPV value in the first year, this amount was nearly
achieved in the next year itself. The following years are also showing a good NPV value and the
actual NPV is 23.21 which is sufficient for the business to take a favourable decision for the
project. These returns will help the business is balancing out its other losses. Also, after five
years many of the cost of business on this project will come to negligible such as the cost
required for training can be eliminated. Also, the amount invested on the development of
software will be avoided. So on the whole, the firm should go on with the project. Regarding cost
it can consult with the seller of software to provide some discount or suggest some software
which is efficient but is of lower cost.
CONCLUSION
From the above analysis, it can be concluded that companies must set a benchmark for
their performance so that they can compare their results with that fixed amount. This will help it
in identifying the areas where there is a need of improvement and the way it can be improved.
Their are various opportunities with the companies that can help them in the growth of their
entity. But before selecting any offer, the company should analyse all the aspects related to it for
selecting the best one. Their are various appraisal techniques that can help the business in
evaluating them properly. Through this they can determine the effect of a particular proposal on
the coming years and profitability of the organisation. Financial ratios of company can also help
in analysing the trends of the firm. With the help of all these things, organisations can make
interpretations for their future and plan their actions accordingly.

REFERENCES
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