Financial Performance and Investment Decisions at Madison Plc

This report provides a comprehensive financial analysis of Madison Plc, a UK-based public limited company. It examines various sources of funding, including borrowings, retained earnings, leases, share capital, and bank overdrafts, with a recommendation for a bank loan to support its expansion. The report also assesses the impact of efficient working capital management on Madison Plc's cash flow. Furthermore, it delves into investment appraisal techniques, specifically net present value (NPV) and internal rate of return (IRR), to evaluate two software investment proposals, recommending the project with the higher NPV and IRR. Break-even analysis is explained for short-term decision-making. In addition to financial factors, the report considers non-financial factors such as manpower, government regulations, and competitor actions in investment decisions. Finally, it includes a ratio analysis to evaluate Madison Plc's financial performance, offering insights for effective decision-making and long-term survival. The report concludes with recommendations to guide Madison Plc's financial strategies.

Finance

TABLE OF CONTENTS
INTRODUCTION................................................................................................................................
1. Different sources of funds, advantage and disadvantage with the recommendation to
Madison Plc for planned expansion programme.........................................................................1
2. Impact of efficient working capital on Madison Plc's cash flow.............................................2
3. Investment appraisal techniques..............................................................................................3
4. Explanation of the break-even chart for short-term decision..................................................4
Other factors in investing appraisal techniques:..........................................................................5
5 Ratio Analysis...........................................................................................................................5
Conclusion............................................................................................................................................
References............................................................................................................................................
Appendix..............................................................................................................................................
Cash Flow....................................................................................................................................9
Net Present Value......................................................................................................................10
Internal Rate of Return..............................................................................................................11
Ratio Analysis............................................................................................................................12

INTRODUCTION
Finance is the soul for every business organization because any organization cannot
survive 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 is
necessary to compete effectively. Present report is based on the financial management of
Madison Plc. It is a public limited company operating in UK from past 10 years. It provides
intellectual property to Oil and Gas companies, HR consultants, Marketing companies, Tourist
companies and investment property funds all over the UK. The report will discuss various
sources of finance, investment appraisal tools and break-even analysis to take short-term as well
as long-term investment decisions. Moreover, the report will carry out an analysis of financial
performance of Madison Plc through ratio analysis. It will helps to evaluate and examine
business performance and take effective decisions for long term survival.
1. Different sources of funds, advantage and disadvantage with the recommendation to Madison
Plc for planned expansion programme
Present scenario stated that Madison Plc is earning good profit by retaining its previous
clients. However, in order to capture large market, it is planning to expand its operation and need
funds for this purpose. There are different sources that can be used by Madison Plc that are
illustrated 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 provide
funds on an implied interest rate. The advantage of using bank loan is it helps to fulfil financial
need for different time duration (Embrechts, Klüppelberg and Mikosch, 2013). Moreover, it
helps 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 keep
any of the assets as collateral security against loan taken. If firm fails to meet out its financial
obligations than bank has right to sell collateral security and recover funds.
Retained earnings: Retained earnings is the available surplus after meet out all the
operational expenditures and dividend payment. It is an internal finance sources and Madison Plc
can 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 or
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other kind of cost on this. However, its disadvantage is excessive ploughing back of returns may
impair the ability to mitigate any financial urgencies. Furthermore, it will be available to a
limited 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 high
capital expenditure (Minsky, 2015). However, on the other hand, Madison Plc need to pay
regular rental charges to the lessor which includes some interest charges also. Thus, it bring fixed
financial cost to the Madison Plc.
Share capital: Madison Plc can issue share capital in the market and gather large amount
of funds. Firms can issue both the preference and equity shares and collect appropriate amount of
funds to support its expansion. The advantage is Madison Plc does not need to pay regular return
to the shareholder in terms of dividend (Tirole, 2010). However, its negative point is it diversify
or 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 balance
in the account. Its advantage is it helps to mitigate urgent financial need of Madison Plc while its
disadvantage is firm will need to pay interest charges on the overdraft taken and bank often
charges a high rate of interest on this facility (Mandelbrot, 2013). Moreover, it does not provide
facility to meet our long term finance requirement.
Thus, on the basis of above findings, it can be reported that finance manager of Madison
Plc 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 an
allowable expenditure for tax computation hence, it will reduce tax obligations and enhance
profitability as well. Furthermore, it does not dilute controlling rights to the lenders hence, this
rights can be fully secured in the hand of owners.
2. Impact of efficient working capital on Madison Plc's cash flow
Madison Plc will need working capital to support its daily functioning otherwise, it will
not 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, utilities
payment 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. It
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can be done by optimum allocation of resources through projection. Madison Plc can determine
potential expenses and incomes through forecasting so that firm will be able to manage its
routine functions. Through this, Madison Plc can estimate future revenues and allocate it in
different operating functions in order to assure maximum utilization of it (Bakand, Hayes and
Dechsakulthorn, 2012). This in turn, it can manage its revenues and control cost so that results in
better availability of working capital and cash flows as well. Thus, it became clear that larger
sales revenues and curtailment of expenditures will assist finance manager to have surplus cash
available to support its routine functions.
3. Investment appraisal techniques
It is also known as capital budgeting tool helps to determine attractiveness of different
investment proposals available and select best proposal. As per the scenario, Madison Plc is
looking to invest in new software product (Wilmott, 2013). Company have two mutually
exclusive proposal available for this that are Madison Super and Madison Platform, having an
equal estimated life of 5 years. Now, firm is intending to invest in one of the two proposals thus,
investment appraisal techniques will greatly assist finance manager to determine most viable
project that will provide more benefits to the organization.
Net present value (NPV): It is the discounted cash flow techniques that forecast future
values of all the potential cash flows during project life time (Buchanan, 2014). However, the
difference between initial project cost and sum of all the discounted value is known as net
present value. The selection criteria of the method says that Madison Plc should invest funds in
the project that have higher NPV compare to other. The most important benefit of this techniques
is that it consider the time value of money and compute actual profit potential of the project.
While, on the other hand, its limitation is considering an appropriate discount rate is very
difficult task. It is because market uncertainties such as interest rate have a direct impact on it
(Chernow, 2010). Thus, incorrect discount rate may lead to harmful business decisions. For the
present scenario, NPV has been computed at 14% and 10% discount rate for Madison Super and
13% and 11% rate for Madison Platform.
Internal rate of return (IRR): It is the rate at which total discounted cash inflows will be
equal to the initial investment. In other words, NPV at this rate will be nil (Damodaran, 2010).
The selection criteria of the method says that Madison Plc should invest funds in project that
have higher IRR than other.
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Recommendations: Net present value of Madison Super software at 14% rate is £3124724
whilst Madison Platform's NPV at 13% rate is £2524365. NPV is higher in Madison Super
Software henceforth, it can be recommended that Madison Plc should invest funds in this project
because it will provide greater benefits to the organization. Moreover, IRR of both the projects
are 32% and 23%. It is higher in Madison Super software by 11%. Moreover, if firm uses 10%
discount rate for Madison Super and 11% discount rate for Madison Platform than project will
generate NPV of £4192399 and £3186361. Thus, it can be seen that Madison Super Software
will generate larger profits and it enable company to gather large profitability. Thus, it can be
recommended that Madison Plc should invest funds in this project. Through investing in this,
firm will be able to enhance its profitability to a great extent.
4. Explanation of the break-even chart for short-term decision
Break-even point (BEP): It is the point at which total revenues and total business
expenditure of Madison Plc will be equal. In other words, it can be said that there is no profit no
loss situation (Hyman, 2013). Madison plc has to assure that their sales revenue must reach at the
BEP level. It is because, it is the point at where resources are optimally utilized and after that,
every additional unit of sale will results in high profits for Madison Plc.
Break-even point (In units) = Total Fixed cost (TFC)/ contribution per unit
Break-even point (In £) = Total fixed cost/profit volume ratio
For instance, if TFC = £100000
Sales revenue = £250000
Variable cost = £100000
Total units = 10000 units
Total Contribution £250000- £100000 = £50000
Contribution Per Unit £50000/10000 = £5
BEP (In units) £100000/£5 = 20000 units
Profit-Volume Ratio £50000/£250000*100 = 20%
BEP (In £) £100000/20% = £500000
Hence, it became clear that Madison plc has to generate higher sales revenue than BEP of
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£500000 so that it can generate profits. However, if this sales target is not achieve than it may
face business loss. Thus, it became clear that break-even analysis helps to take short-term
managerial decisions through getting larger revenues and profitability as well.
Other factors in investing appraisal techniques:
In investment appraisal, it is not the only requirement to consider all the financial factors
there are also some non-financial factors that must be consider while taking investment
decisions. Some of the non-financial factors that Madison Plc should evaluate are enumerated
below:
Manpower: In this, Madison Plc need to make sure that he has enough manpower
available in the business or not to operate its new software (Duchin, Ozbas and Sensoy, 2010).
Workforce must be highly able, skilled and experienced so that they can operate new equipment
easily. Otherwise, it may face operational difficulties to a great extent. It is essential for the
Madison Plc to recruit talented manpower so that software can be operated by them. Training
program provides a great assistance to enhance personnel skills.
Government regulations: Before making any investment, Madison Plc should analyse the
governmental rules and regulations because all the organizations are strictly abided to comply
with the legislation and governmental policies (Yescombe, 2011). With reference to Madison
Plc, firm must anticipate potential threats that can be incur due to changing government
regulations and have a significant impact of investment decisions. They should analyse current
and future legislation which must be followed by Madison Plc.
Competitor’s action: In the present age, fierce level of competition exists in the market.
Henceforth, it became necessary for Madison Plc to analyze their competitor’s actions and
identify what software are using by the competitions. It will help to take better investment
decisions. Determination of future threats in order to protect intellectual property from the
potential competition it essential for Madison Plc.
5 Ratio Analysis
Puteaux France:
Net profit ratio reflects firm ability to control its indirect expenses and it also indicate
proportion of sales that is covered by the net profit. It can be seen from the table that in 2011 net
profit ratio was 17.63% and in next fiscal year it become 20.32%. This reflects that firm maintain
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good control on its indirect expenses. Gross profit ratio like above ratio also increased from
25.45% to 29.31%. This reflects that firm maintain stiff control on its direct expenses. Hence, it
can be said that Puteaux give magnificent performance in its business. Current ratio indicate firm
capability to pay its current liability by using current assets. Current ratio of the firm increased
from 1.8 to 3 which indicate that firm have sufficient amount of current assets and it can pay its
current liabilities on time. In case of return of asset also firm give good performance and it can
be seen that return on assets get increased in 2012 from 21.06% to 21.82%. Hence, it can be said
that firm make best use of its assets. Firm is earning good return on equity and it is positive
performance from investor’s point of view. Thus, on the basis of results of ratios it can be said
that firm gives excellent performance in its business.
Mella Spain:
According to the computation of ratio analysis various prospects of financial position of
Mella Spain Company has been identified. However, on the basis of analysis it can be said that
comparing the cited firm through Puteaux France the position of Mella Spain is not so good. It is
because of the fact that, net profit ratio of company is showing constant results which are also on
the lower side as in 2011 8.93% while following years 8.94% and 8.93% respectively. Further,
gross profit ratio of the firm indicates that same outcomes of 9% throughout the functioning of
three years. Thereafter, current ratio of the firm is relatively on the lower side as compared to its
competitors which are 0.6, 0.5 and 0.4 in 2011 to 2013. In addition to it, return on assets
indicates that company is making optimum utilization of its assets in terms of generating the
revenue as its ROA is 28.25% in 2011 which increased tremendously in following years to
48.11% and 123.68% respectively. Lastly, return on equity shows better outcomes for the
shareholders as company is able to provide suitable returns of its shareholders on its invested
amount as it shows ROE of 0.28, 0.48 and 1.24 in 2011 to 2013.
CONCLUSION
In conclusion to the above report it can be said that there are several sources of finance
available for the Madison plc that manager has to evaluate and analyze. Further, through the
means of different investment appraisal techniques it has been evaluated that project Madison
Super has been recommended to the top level management of Madison Plc. Lastly through the
means of ratio analysis comparison between two organization Puteaux France and Mella Spain
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has been evaluated and on the basis of this tool it has been identified that Puteaux France have
better financial position in comparison to the Mella Spain.
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REFERENCES
Bakand, S., Hayes, A. and Dechsakulthorn, F., 2012. Nanoparticles: a review of particle
toxicology following inhalation exposure. Inhalation toxicology. 24(2). pp.125-135.
Brealey, R.A. and et.al., 2012. Principles of corporate finance. Tata McGraw-Hill Education.
Buchanan, J.M., 2014. Public finance in democratic process: Fiscal institutions and individual
choice. UNC Press Books.
Chernow, R., 2010. The house of Morgan: An American banking dynasty and the rise of modern
finance. Grove/Atlantic, Inc..
Damodaran, A., 2010. Applied corporate finance. John Wiley & Sons.
Duchin, R., Ozbas, O. and Sensoy, B.A., 2010. Costly external finance, corporate investment,
and the subprime mortgage credit crisis. Journal of Financial Economics. 97(3). pp.418-
435.
Embrechts, P., Klüppelberg, C. and Mikosch, T., 2013. Modelling extremal events: for insurance
and finance. Springer Science & Business Media.
Gitman, L.J., Juchau, R. and Flanagan, J., 2010. Principles of managerial finance. Pearson
Higher Education AU.
Hyman, D., 2013. Public finance: A contemporary application of theory to policy. Cengage
Learning.
Kotz, S., Kozubowski, T. and Podgorski, K., 2012. The Laplace distribution and
generalizations: a revisit with applications to communications, economics, engineering,
and finance. Springer Science & Business Media.
Mandelbrot, B.B., 2013. Fractals and Scaling in Finance: Discontinuity, Concentration, Risk.
Selecta Volume E. Springer Science & Business Media.
Minsky, H.P., 2015. Can" it" happen again?: essays on instability and finance. Routledge.
Tirole, J., 2010. The theory of corporate finance. Princeton University Press.
Wilmott, P., 2013. Paul Wilmott on quantitative finance. John Wiley & Sons.
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Yescombe, E.R., 2011. Public-private partnerships: principles of policy and finance.
Butterworth-Heinemann.
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APPENDIX
Cash Flow
Madison Super
Year 0 1 2 3 4 5
New Software Costs 5500000
Working capital 412000 566500 721000 875500 1030000
Sales Revenue 5665000 6695000 7931000 9012500 10094000
Less
Component A 696800 832000 988000 1144000 1404000
Component B 1112800 1560000 1872000 2184000 1872000
STO1 294000 299644.8 305398 311261.6 317237.8
STO 2 170000 171496
173005.
2 174527.6 176063.5
Capital Allowance (25%) 1375000
Overheads 283250 334750 396550 451140 504700
Expenses 3931850 3197891 3734953 4264929 4274001
Cash 1733150 3497109 4196047 4747571 5819999
Less: Tax Rate 33% 571939.5 1154046 1384695 1566698 1920600
Cash Flows 1161210.5 2343063 2811351 3180872 3899399
2)
Year 0 1 2 3 4 5
New Software Costs 8500000
Working capital 515000 672590 830180 987770 1145360
Sales Revenue 6386000 7790920 9271030 10846930 12366180
Less
Component A 354640 550160 842400 1095120 1498640
Component B 1372800 1950000 2340000 2831920 3062800
STO1 294000 299644.8 305398 311261.6 317237.8
STO 2 170000 171496 173005. 174527.6 176063.5
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2
Capital Allowance (25%) 2125000
Overheads 191580 233810 278100 325480 370800
Expenses 4508020 3205111 3938903 4738309 5425541
Cash 1877980 4585809 5332127 6108621 6940639
Less: Tax Rate 33% 619733.4 1513317 1759602 2015845 2290411
Cash Flows 1258246.6 3072492 3572525 4092776 4650228
Net Present Value
NPV Madison Super
Year Inflow PV factor @ 14% Amount
1 1161210.5 0.877 1018382
2 2343063.164 0.769 1801816
3 2811351.393 0.675 1897662
4 3180872.415 0.592 1883076
5 3899399.131 0.519 2023788
Total 8624724
less: Initial Investment 5500000
NPV Madison Super 3124724
NPV Madison Platform
Year Inflow PV factor @ 13% Amount
1 1258246.6 0.885 1113548
2 3072492.164 0.783 2405761
3 3572524.993 0.693 2475760
4 4092775.915 0.613 2508872
5 4650227.931 0.542 2520424
Total 11024365
less: Initial Investment 8500000
NPV Madison Platform 2524365
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