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Accounting and Finance

Extracts from this document...

Introduction

University of Bradford School of Management Postgraduate Full time MA Accounting and Finance Course leader: Les Chadwick Tutor: Dr Mohammed Hudaib Words count: 3243 UB NO Family First Course Group Team 04013265 Tan Zhe IBM A 11c 04010013 Yang Xiuwei IBM A 11c 04003701 Su Chin-Yi IBM A 11c 03013551 Yamamoto Takao IBM A 11c 04001507 Troyanovska Kateryna IBM A 11c 03013677 Yang Dailin IBM A 11c 03-12-04 Introduction The Lee Chew Cheng Wong Chemical Company produces high quality speciality chemicals, and it exports around 85% of its output to many countries and regions. Since the establishment in the mid 1980 this company has emphasized the shareholder value. To keep this focus, a new Chief Executive Lee Shan Loke Teo has proposed a lot of new policies. This assignment evaluates the financial rations with Sun See Chemical Company and average industry, and presents the financial effect of the proposal that Lee Shan Loke Teo adopts. That final section shows the recommendation of costing system and capital expenditure budget. Evaluate the financial performance As the profit and loss account shows, the Lee Chew Wong Chemical Company's net sales decreased from $5.6m to $4.2m, and the gross profit reduced from $1.8m to $1.5m, while in 20x9 the retained profit of the company reached the peak of $0.4m during this period. Although the sale volumes decreased, the profits went up. From the financial statement it can be found that the difference is due to the large operation expenses which eliminate the profit between 20x8 and 20x9, and the less retained profit also results the decrease of Earning per share. Therefore, the EPS and Retained Profit in 20x9 were higher than 20x8 and 20x7. As regards the balance sheet, in 20x9 the total asset of the company increased significantly compared to 20x8 and 20x7, because the fixed assets increased apparently but it also resulted the shortage of cash in 20x9. ...read more.

Middle

The companies have several ways to acquire the cost of capital, so they will measure the opportunity cost of all source of capitals which contain debt or equity. In the financial point of view, companies try to acquire the lower cost of capital to develop the business and maximize the value of company, but they also should consider and evaluate the risks of cost of capital source. It is called the optimal capital structure (the lower Weighted Average Cost of Capital), which composes of the portfolio of the debt, preferred stock, common stock and so on. Generally, an increase of gearing ratio may decrease WACC and reduce the cost of capital, because interest on debt is tax deductible. However, higher gearing will result in higher risk of financial burden. In our case, it is difficult to make a judgment without much information on the firm and economy. Hence, we should make some assumption. 20x9 the total capital =equity +debt= 4.5million=3.8million (equity)+0.7million Assume: KD: rate of return on debt=10% KE: rate of equity capital =ROE=12% Corporate tax=30% Expected annual cash flow=1million Calculation : The proportion of equity =3.8/4.5=84% The proportion of debt=0.7/4.5=16% The cost of capital : KD after tax=10% (1-30%)=7% WACC= 84%*12%+16%*7%=11.2% The total value of firm = expected annual cash flow/WACC= 1/11.2%=8.93m If the company increases the proportion of debt from 16% to 20 %, WACC is 11% and the cost of capital reduces and the value of the firm maximize. In addition, company repurchases stock from the market and it also will reduce the cost of capital, but it should notice the limitation number of repurchase stock according to the corporation law. In this case, it is hard to judge because it does not show the accurate share capital figure, but in 20x7 the shareholders equity is 3.3 million ponds and in 20x9 the shareholders equity is 3.8 million ponds, so from this data it presents that the safe maximum of repurchase stock is 0.5 million (3.8-3.3). ...read more.

Conclusion

financial officer determines amount of available funds; b) departments submit proposals; c) finance department matches them with amount available; d) apportioning total funds to various divisions. Financing budget - borrowing or issuing new equity securities - a) divisions submit requests; b) financials analyse availability of funds and in case of lack - plan acquisition of necessary funds (Istvan D.F., 1970). Choice of items for inclusion in annual capital budget depends on degree of urgency and necessity, comparative advantage of different schemes (Court H.P., 1961). However, capital expenditure budgeting requires control in dollar and time dimension. Firstly, company monitor actual figures and planned, secondly, in case of gap re-evaluate and find a reason, and finally have procedures to handle a gap. After the end of selected period it is advisable to conduct postaudit aimed to measure actual results (profitability or years to return capital invested), compare these results with predicted, take action regarding any differences between the two (Istvan D.F., 1970). Thus, for our analysed company Lee Chew Cheng Wong because of reorganisation we suggest departments make a plan of capital usage, propose how to reduce capital expenditure after reorganisation and describe necessary increase to successfully reallocate resources, equipment and move production. That would require a short and long-range planning and control of efficiency procedure creation - budgeting. Conclusion Overall, the ratio analysis discussed the problems with the current financial activities. In view of this situation, the Chief Executive should in order to implement some actions to reduce the unnecessary expenditures, deal with the redundancy and invest in different areas which we have suggested above. Staff training and use e-commence IT system such like online dealing business would cost money, but the company would be more efficiency and effectively, therefore that would save lots of time, communication costs and higher production in the long term. Furthermore, manager's decision is very important; both benefits and risks need to be considered; poor decision-making might land the company in a predicament. By improving the financial performance, the company would be able to add more value and be more successful in the future. ...read more.

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