Programme Title: NJW10 Pearson BTEC Level 5 HND in Business
Unit Number: Unit 2 Managing Financial Resources and Decisions QCF L4
Title: Managing Financial Resources and Decisions
College: Icon College Of Technology And Management
Assignment Context and Business Scenario
Radisson Plc is a medium-size computer software manufacturing company operating in London. The company has recently acquired a long term contract to provide bespoke software for various companies around UK.
The Operations Manager believes that there are lots of opportunities to expand their operations and to increase their market share in the industry.
What you must do:
A. Identify the appropriate sources of finance available for the selected business for its operations and assess the implication of different sources. [P1.1 and P1.2, M1]
B. Evaluate the appropriate sources of finance for the expansion plan of the above company. [P1.3,D1]
- To achieve M1 you will have applied an effective approach to the evaluation of the appropriate sources of finance for the expansion project.
-To achieve D1 you will provide a wide range of sources of finance and evaluate to draw conclusions to on the most appropriate sources of finance with justification.
The management of Radisson Plc is unsure about the capital structure of the company and asks for your advice about the cost of financing the expansion.
A. Analyse the cost of funding the project using equity versus debt finance and recommend your choice. [P2.1]
B. Explain the importance of financial planning and assess the information needs for financial decision making. [P2.2, P2.3
C. Explain the impact of suggested financing option on the financial statement. [P2.4, M2] ICON College of Technology and Management
- To achieve M2 you will have applied relevant theories and models to assess the cost of financing decisions
Investment decisions are the most important decisions that a company makes. They commit a substantial amount of money on making decisions which are likely to have a large impact on a company's performance over a long period of time.
A. Analyse the importance of budgets for variation and make appropriate decisions for Radisson Plc. [P3.1]
B. Explain how you would calculate unit cost and make pricing decisions based on appropriate information at the Radisson Plc. [P3.2]
C. Assess the viability of the expansion project using investment appraisal techniques such as the NPV.. [P3.3, D2]
- To achieve D2 you should have demonstrated that substantial activities have been planned and managed to assess the viability of Radisson Plc’s expansion plan.
At the end of a company’s financial year, there are a number of procedures that need to be performed to ensure that the business’s finances are in order. Across all industries, the financial health of a company is measured against three major financial statements, namely Income Statements, Statement of Cash Flows and the Statement of Financial Position.
A. Discuss the above mentioned financial statements of Radisson Plc. [P4.1, M3]
B. Select two different types of companies (one could be Radisson Plc) and compare the formats of financial statements. [P4.2, M3]
C. Interpret the financial statements using appropriate ratios of a public limited company and compare with those of another company. [P4.3, D3]
- To achieve M3 you will have selected a range of appropriate methods to discuss the financial statements of Radisson Plc.
- To achieve D3 ideas have been generated and decisions taken to interpret the financial statements using appropriate ratios of a public limited company and compared with those of another company
Analysing cost of financing the project using financial tool and recommendation of the choice [P 2.1]
Capital structure is defined as raising funds from different sources to create capitalization, various sources of funds include preference share capital, debt capital and equity capital. Capital structure of a company may be again referred as the relationship between debt capital and these long term funds (DeAngelo and Roll, 2015, P.390). Hence it becomes very important for a company to choose from these variants wisely in order to raise funds because it might affect the value of the firm if not managed properly.
According to the operation manager of Radisson Plc. lots of opportunities are available in the market to increase their market share in the industry.
In order to operate this operation the company has to analyse the cost of financing the project wisely. In one hand company has the option to raise funds either from the equity shareholders, preference shareholders, debenture holders or from the other long term credit and in the other hand the company must evaluate whether these decisions comply with company’s debt capital or not. To support the discussion a comprehensive summary is given below to show the comparison between equity finance and debt finance.
Before producing summary it is good to know the thesis regarding the procurement of funds and factors considered for procuring funds.
|Sources to procure funds|
|Loans and debentures|
|Risk to company|
|Cost to company|
|Dilution of existing control|
Let's assume the rate of interest and rate of dividend of :-
Loans and debentures = 10%
Preference share = 20%
Equity share = 40%
|Loans and debentures @10% (safest)||Preference share @ 20% (medium risk)||Equity @ 40%|
|1-Risk to company||Highest risk||Medium risk||Minimum risk|
|2-Cost to company||Minimum||Medium||Maximum|
|3-Dilution of of existing control (ownership right)||No dilution||No dilution||Full dilution|
Explanation of 1-Risk to company with respect to the source of funds.
Debenture interest is compulsory, so company faces maximum risk. If debenture interest is not paid the company will be considered as defaulter and shareholders may sue for winding up the company. Hence company faces highest risk.
Payment of preference dividend becomes compulsory only if the the company earns profit otherwise not. So, the firm faces medium risk.
However equity dividend is not compulsory even if the company earns profit, hence no risk to company.
Explanation of 2-Cost to company with respect to the source of funds.
Debenture holders are safest because payment of debenture interest is compulsory, hence they expect minimum rate of interest. Also tax benefit on interest will further reduce cost of debenture. So, cost to company is minimum.
Payment of preference only becomes compulsory if the company earns profit. so , preference shareholders expect medium rate of dividend. Also corporate dividend tax will increase cost of preference share. Hence preference share gives medium cost to company.
Whereas equity dividend is not compulsory, also they will be paid at last on liquidation. So, equity shareholders face maximum risk. Due to this reason they expect maximum rate of rate of equity dividend. However corporate dividend tax (CDT) increases cost of equity share. So, maximum cost to company can be expected.
Explanation of 3-Dilution of existing control.
Ownership right simply means whether new fund provider can interfere with the company's present decision making or not.
Debenture holders have no voting rights, hence no dilution.
Preference shareholders also have no voting rights, so no dilution, but if new funds are raised from equity shareholders, then the preference shareholders get the voting right (Renneboog and Szilagyi, 2015).
Equity shareholders have the voting rights, they will participate in decision making indicating full dilution.
Assessing the information of the financial decision making and financial planning [P 2.2, 2.3].
Financial decision making is a very critical part of the financial management of the company. In order to make the financial decision more reliable, financial information related to the financial statements need to be analysed retrospectively and prospectively. Apart from other peripherals of the management process, financial planning is the core element of the business management because financial statement reveals all the strengths and weakness of the company. Moreover in financial planning all the technical tools related to comparison of strength, mining the weakness can be used. For example preparation of common size and comparative size income statement and balance sheet. Thus it can be stated that information related to finance is more viable than other vital information (Tomlinson, 2015).
In the context of above explanation some importance of financial planning is listed accordingly.
Understanding the impact of selected financing option on financial statement [P 2.4, M2]
From the above discussion it is to be concluded that choosing right source of finance is not very easy because each source has advantages and disadvantages. Somewhere cost to company becomes high or somewhere risk to company rises. Hence it is better to raise funds form preference shares as it affects company moderately on overall aspects as it is shown in the above mentioned summary.