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MFRD Assignment Help are various attributes that get utilized for running a business firm. In these attributes one major attribute is finance because in order to support the business activities adequate balance of finance. In the absence of finance business can’t make survival for longer period. There are different and effective sources of finance are available that can be preferred as per the requirement of the business.
(AC 1.1 & 1.2) Sources of finance: –
Entrepreneurs will always seek to expand their businesses. However, finding finances to broaden the business is a nightmare especially for startups. Such companies need money to develop business premises as they grow. Likewise, as customers increase, the company needs to expand production to meet the needs of growing client base. Despite the hindrances, eight prime sources of finance that a company can utilize in its desire to develop exist.
First, the capital market is an excellent source of funding for businesses where a company can offer new shares or rights to issue to raise money. A company wishing to increase its liquidity can sell new shares in the market. Such an approach is advisable when the business needs to put up more infrastructure to boost production as the market expands beyond expectations. Such was the case with Apple Inc. when Steve and Wozniak sold more personal computers than anticipated. However, raising more financed through the issuance of new shares implies transferring control of the business to the public and dilution of existing stock. Public companies need to seek the consent of shareholders before making landmark business decisions such as mergers and acquisitions. However, a company could raise more finance through rights issues or offer preference shares without losing managerial control to ordinary shareholders (“Agriculture and Consumer Protection”).
Secondly, a business could raise funds by acquiring long-term loans from the financial market. Jean (2010) observes that loans are the primary source of business funding for expansionary services as well as addressing cash flow problems in business. The business will receive the nominal amount but will incur interests while repaying the loan. Interest is the primary cost of raising finance through loans. High-interest rates increase the costs of using loans to fund a business. However, loans reduce the tax payable to the government, as loan repayment is an expense to business hence reducing taxable income (“Agriculture and Consumer Protection”).
Furthermore, business could raise finance through ploughed back profit. A company operating at a profit can dedicate a portion of the profit for the purpose of expanding operations rather than dedicate the whole profit to issuing dividends. Jean (2010) observes that retained profits are the best source of business finance at it involves no payment of cash. Moreover, retained profits give the management flexibility in operations, as there would be no need to include shareholders or outsiders such as banks while undertaking investments. The cost of retained earnings is reduced dividends to shareholders while there is the tax effect is non-existent, as the government does not require companies to pay income taxes on retained earnings (“Agriculture and Consumer Protection”).
Besides, a business could raise finance through leasing. A lease is a form of an agreement between the business and the owner of the property the company seeks to hire. The lease requires the company to pay the lessor a specified amount of money during the agreed period. Under operating lease, the lessor supplies and maintains the equipment. However, the leasing period is short. Under a finance lease, the company services and maintains the leased equipment. Servicing and maintenance costs are essential costs to a company that chooses to raise finance through leasing. On the other hand, tax implications of leasing are that the corporation cannot take tax deductions for the depreciations of the leased assets (“Agriculture and Consumer Protection”).
Likewise, hire purchase is another prime source of finance for business. Under hire purchase terms, a company receives goods from a supplier upon paying a down payment. Moreover, the industry needs to commit to paying monthly installment until the vendor recovers the full amount of the purchased goods. As opposed to leasing where the lessor assumes the ownership of the assets upon expiry of the leasing period, the business acquires the full ownership of goods upon clearing installment payment. Costs of obtaining finance through hire purchase are the prices of goods are much higher than while obtaining similar goods on pay on delivery basis. Unlike leasing, a company can apply for tax deductions due to depreciation (“Agriculture and Consumer Protection”).
Agriculture and Consumer Protection proposes franchising as an excellent source of business expansion capital. Franchising occurs when the business agrees to pay the franchisor for the rights to use its intellectual property and trade name to operate locally. The franchisor incurs costs such as legal expenses, support services, and legal costs. However, the business benefits from the backing of an established firm with a strong brand reputation. The costs of the market franchise include initial franchise fees and payment of interest on payments and loyalties. Franchise tax implication occurs regarding capital gains tax during the termination of the agreement as the business receives a price from the franchisor.
Moreover, a business could consider debentures as an alternative source of financing business operations and investment. James defines a debenture as loan certificate issued by a business to back a certain loan as oppose to tying the loan to collateral. However, such unsecured loans are only possible if the business has reputable creditworthiness. The bearer of the certificate earns a fixed rate of interest until the maturity of the loan. However, the business can also issue perpetual debentures. The costs of using debentures lie in the premise that the business needs to pay fixed interest to the bearer irrespective of whether it makes profit or loss. Debentures make a company pays less income tax since loans are expenses.
Lastly, a business can rely on venture capital to finance expansion, pay employees, as well as sustain a healthy cash flow in the business. A business could count on the entrepreneur’s finances for continued operations. Moreover, the business could use an impeccable business plan to woe organizations and business expansion schemes into funding the business. However, the business will need to convince venture capitalists of high returns if they invest their money into the business. Preferred stocks are the main costs of venture capital, as the business will need to dedicate a portion of the business cash flow to pay equity holders for life. On the other hand, venture capital reduces owner’s control of the enterprise, as major decisions will need consent from venture capitalists (Atrill and McLaney).
(AC 2.1) Cost and tax effects of each source of finance such as: –
Equity shares: – The cost is associated in the form of the issues expenses as well as the inclusion of dividend amount paid to the shareholders. There is no such tax relaxation is provided over the amount paid to the shareholders because shareholders termed as owner of the company and dividend is just like a part of profit that get shared with them.
Long term loans: – The cost is associated in the form of the legal fees and the interest amount paid over the loan amount for a specific period of time. There is a tax relaxation facility is provided with the payment of interest amount. As some part of interest is deducted from the profit earned which lower down the share of taxable profit.
Retained profits: – There is no such cost is associated with it and no tax is paid over it as it is the organization owned money. It is that part of profit which is put into reserves in order to utilize it for future prospective.
Leasing: – The cost is associated in the form of fees and rentals paid for the lease. There is tax relaxation facility is provided over the rental payment. It lower down the profit earned share for taxation purpose.
Hire purchase: – The cost is associated in the form of interest paid to the seller. The amount of interest paid get utilized for getting tax relaxation benefit as the amount of interest is deducted from the total taxable profit.
Franchising: – The cost is associated in the form of share of profits and there is no relaxation is made in the tax amount.
Debenture: – The cost is associated in the form of issues expenses and interest paid. The amount paid as interest over debentures get utilized for getting tax relaxation benefit.
Venture capital: – The cost is associated in the form of profit sharing and amount paid is not considered for getting tax relaxation benefit.
(AC 1.3) Appropriate sources of finance such as: –
On the basis of the above discussion the appropriate sources of finance are as follows such as:
Equity shares: – For the huge profits issuing equity shares become effective as it helps in getting capital amount for investing in a project. It provide huge financial base for performing different activities.
Long term loans: – It is also become beneficial in capital projects and it also provide benefit in getting tax deduction facility. It increases the creditability in the market once they repay the loan amount successfully
Leasing: – With the help of it required equipment get arranged by investing small amount. They can make use of equipments for a set specific period of time and after the completion of time they can renew their lease or return that equipment to the owner.
Retained profit: – Organization make use of their reserve funds or the amount saved in retained profits. It helps in avoiding unnecessary debt over the organization.
Conclusion: – It is concluded that there are various different sources of finance are available that get preferred on the basis of requirement of the business organization. Before getting funds they make evaluation of every source and helps in getting adequate source for meeting their requirement.
Part A: AC 2.2
Introduction: – In the below report financial planning and its importance get discussed in effective manner as why it is important to adopt financial planning and how it is beneficial for organization. Financial planning is the process of making plans in order to utilized the available finance in adequate manner. There are lot many decision makers are there that shows interest in getting the different kind of information from the organisation.
Atrill and McLaney observe that financial information is key in making a business decision (2). As such, financial planning is imperative to ensure that such information is available when needed by key decision makers. An enterprise has both internal and external decision makers who rely on the efficient flow of financial information in the business. Internal users include management for measuring organizational progress, employees to determine the impact on their future remunerations, and the owners to determine the viability of their investment. On the other hand, external users include creditors who depend on a business financial information to determine its creditworthiness. Moreover, tax authorities rely on a firm’s financial information to determine the applicable taxes. Likewise, investors use financial information to determine whether to invest in the company. Lastly, regulatory authorities such stock exchange commission needs a company’s financial information to ascertain that reporting is within the stipulated legal guidelines (Atrill and McLaney 3).
Importance of the financial planning such as: – Financial planning is important to a business from five main perspectives.
First, it allows the management to exercise prudent management of business cash. Businesses revenues vary depending on seasons. For instance, Apple Inc. will have plentiful cash when it launches a new iPhone as the revenues skyrocket. However, as the impact of the new model dwindles, the sales revenues follows suit leading to decreased cash in the business. Financial planning enables the management to account for such cash variations to ensure a shortage of cash when revenues go down does not hamper business operations. Shortage of cash in the company implies the business cannot honor its financial obligations such as payment of salaries, clearing debts, as well as replenishing stock. Prudent financial planning helps the managers evade such pitfalls (Brinckmann et al. 24; Campello et al. 1950).
Secondly, financial planning helps the executives to map the business to its future. Businesses face issues and crises on daily. As such, the chances of focusing on solving such short-term issues are higher than ever. Such a short-term view implies that the managers spend less time contemplating a viable long-term growth for the business. Financial planning helps the management to acquire a long-term perception of the company. Failure to plan finance makes the business vulnerable to completion. Good financial performance increases the businesses ability to innovate hence the ability to compete favorably in the market. A financial plan acts as the blueprint of keeping the company on a growth path thereby giving it a leading position against competitors (Brinckmann et al. 25).
Thirdly, financial planning helps the business owner to spot trends in the business performance curve. Business executives make hundreds of decisions on a monthly basis. Therefore, as the decisions increase, it becomes increasingly difficult to understand the strategies worked and those that did fail. Financial planning enables the entrepreneur to set quantifiable targets that help compare to the end of year financial results. For instance, a financial plan will help the manager note when an increase in advertisement activities increased sales. Likewise, financial planning will aid the management to pinpoint specific areas such as employees’ salaries and energy bills that are likely to burgeon expenditure hence minimizing net income. The lack of a focused financial plan against which to assess, business performance exposes the business to mismanagement risks (Brinckmann et al. 28; Campello 1956).
Fourthly, financial planning helps the business to prioritize expenditure. Business has critical areas such as marketing, production, gaining new markets, and paying salaries. If the business spends its cash without determining areas with a dire need for cash, the probability of failing is more likely. For instance, if a company spends too much on administrative salaries, it risks starving marketing and business operations such entering new markets the badly needed cash. Therefore, financial planning helps the business avoid such pitfalls by helping focus more on areas that need immediate attention. Such areas include paying basic salaries, improving production efficiency, and entering new markets. On the other hand, planning postpones cash to other non-priority areas such as employee bonuses and customer discounts (Brinckmann et al. 35; Campello 1966).
Lastly, financial planning enables a company to boost capital. Prudent management of business finance increases cash flow in the business. The increase in cash flow points to an expanding capital for the business. Increasing capital is a key goal for most businesses. However, the chances that a business will eat its capital are high with the lack of financial planning. Financial planning assists the management in keeping track of tax payments, focused spending, and informed budgeting. Such endeavors help retain sufficient cash flow in the business for investment in business equipment thereby increasing business capital (Brinckmann et al. 39).
There are number of decision makers that shows interest in getting information from the organization. These different decision makers are as follows such as: –
Shareholders: – They demand for the information related to the profitability, liquidity and financial position in order to took decisions related to the investment. If they found that company’s profitability and liquidity is not effective then they can’t make further investments in business.
Government: – They demand for the information related to their financial position, liquidity and profitability as they need to evaluate the taxation liability and also want to ensure that they are following set standards or not.
Board of directors: They demand for all financial statements, performance evaluation reports, and other analysis reports as they make use of these information for making effective decisions in order to improve performance (in case of need), set new targets or build new policies and many more.
Management: – They demand all the reports of different analysis, financial statements in order to evaluate their overall performance and according to need they prepare various plans, budgets, etc. for the purpose of getting the new objectives or targets set by board members.
Employees: They are looking for getting information related to the profitability and liquidity as they make assumptions of getting performance appraisals, bonuses, salary hike and etc.
Creditors: They are looking for getting information related to their liquidity and profitability as with the help of these information they evaluate whether they render additional credit to them or not.
Conclusion: It is concluded that for business organization it is necessary to made financial planning in order to make effective use of their available finance. Along with this they also get benefited with it as it helps in saving funds for future prospective, helps in evaluating the need or requirement of funds and many more. Also there are various decision makers that require huge and effective set of information for the purpose of their decision making. As their decisions get influenced with the effective of the information provided by the organisation.
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Part B: AC 2.4
Loans with a payment period exceeding 12 months are long-term liabilities (Du Toit and Elda 30). As such, when R Riggs obtains the 5-year loan of 20,000 pounds, its long-term liabilities will increase by the total payable amount at the end of five years.
The payable loan amount
Capital = Assets-Liabilities
Assets=Fixed+ Current Assets.
Liabilities= Current liabilities + Long-term liabilities.
Therefore, the loan will decrease the Riggs capital by 32,210.2 pounds.
- b)Credits arrangements between the business and suppliers payable within 12 months increase a company’s current liabilities. Riggs arrangement with its major supplier increases the accounts payable by £5,500 leading to an increase in total liabilities by a similar amount.
- c)Stocks are long-term assets for business. Ideally, companies sell socks to institutions and the public with no intention of buying them back shortly. As such, shares increases the amount of cash available to the business leading to an increase in the company’s capital.
Therefore, if Riggs issues an additional 1,000 shares at £4.5 per share, the capital or shareholders equity will increase by 1,000 x £4.5=£4, 500.
- d)Furniture falls in the fixed or long-term assets of a company together with land, buildings, and vehicles. Fixed assets increase a company’s capital. Therefore, disposing of fixed assets with no profit results to a reduction in the firm’s overall capital. Taking Riggs as an example, disposing of some office furniture worth £3,000 will decrease the value of its fixed assets leading to a decrease in net assets. Consequently, capital will decrease with a similar amount.
Yuri budget has five analysable variances that give a glimpse of the company’s performance in the market. First, sales quantity variance shows that the company sold lesser units in the market than anticipated. According to Jean, sales quantity variance is favourable when a company sells more units of products than anticipated during a particular accounting period. On the other hand, the variance is unfavourable when the company fails to reach the targeted unit sales (Du Toit and Elda 207).
Yuri’s sales variance=actual sales-budgeted sales= (25,000) which is unfavourable. The variance shows that Yuri sold lesser units that it anticipated which are not favourable for the company. Stiff competition in the market is the most likely cause of the adverse variance leading to declined demand for Yuri product as competitors introduce cheap substitutes in the market. Moreover, unavailability of critical manufacturing components such as quality steel pushed the sales down due to high production costs. Therefore, the company should seek to use differentiation as its competitive strategy rather than cost leadership to increase demand for its products. Moreover, the company should strike better deals with steel suppliers to attract quality steel (Du Toit and Elda 208).
Secondly, Yuri material price variance is favourable by 4,500 pounds. Material price variance is the difference between the actual price of material and the budgeted price. A negative variance is favourable to the business as it the case for Yuri. Five factors might have caused the favourable variance. Decrease in price levels for materials, purchasing low-quality materials, better procurement practices, impeccable price negotiation skills, and bulk buying. However, Yuri’s price variance mostly resulted from the purchase of substandard steel, as there is a limited supply of high-quality steel in the market. The company needs to look for quality steel beyond its current market to secure high-quality steel (Du Toit and Elda 213).
Moreover, material usage variance indicates the company had a favourable variance of £3,000. Material usage variance points to the difference between the actual materials used and the budgeted materials. Yuri’s favourable material usage variance points to efficient utilization of materials during production. Such could be due to the purchase of high-quality materials, impeccable use of skilled labour, better training and development of workforce thereby boosting production, and automated manufacturing. However, such was the case for Yuri due to availability and greater use of skilled labour. Therefore, the company should invest in training and development of existing workforce to increase productivity (Du Toit and Elda 226).
Likewise, Yuri has an adverse labour rate variance. Labour rate variance is the difference between actuals labour costs and budgeted labour costs. A positive variance shows the company spent more on labour than budgeted, as is the case with Yuri with a labour rate variance of 3,750 pounds. Such could have been the case due to the company hiring highly skilled labour that predicted. Therefore, the company needs to hire labour that aligns with the company needs (Du Toit and Elda 228).
Lastly, Yuri’s labour efficiency rate shows the company had a favourable variance of £5,625. Such could have been the case due to hiring highly skilled labour that negatively affected the labour rate. As such, the company needs to employ workers with skills that match its production (Du Toit and Elda 232).
- Calculating the cost of doing the job requires adding both direct and indirect costs of producing the leaflets.
Total cost for the job= direct costs+ indirect costs.
On the other hand, determining the cost per leaflet entails adding 10% of the unit cost to the unit cost per leaflet to cover overheads and profit to the company and dividing by the number of production units.
Unit Cost= (Production Cost+10% of the production cost)/Total produced Units
- Total production cost=direct costs + indirect costs
Direct costs=£204×3+ £2×9+2×15=£660
Indirect cost=2x£55 +2x£40=£190
- price for the job=£850+10% of £850=£935
- If labour is 2.5hours, labour costs=£15×2.5=£37.5.
Therefore, production costs=£857.5
- If labour hours=1.5, labour costs=15×1.5=£22.5
Therefore, production costs=£842.5
- Accounting Rate of Return: – It is the amount of profit or return that get earned over the investment made. It can divide the average profit by the amount of initial investment in order to get the ratio or get the expected rate of return.
Profits=Cash flow- depreciation + resale value=£110,000-£50000+£10000=70,000
- Payback period: – It is the time duration required for the purpose of recovering the investment in terms of profits or savings. Lower the period shows less risk is associated with investment and vice-versa.
- NPV= It is an effective tool that get utilised for the purpose of analysing profits related to the project investment. It is an effective difference among the present value of cash inflows and present value of cash outflows. Higher NPV results into higher profitability and vice-versa.
- Profitability index= PV of future cash flows/initial cost
Profitability index (or PI) or Profit Investment Ratio (PIR) or Value Investment Ratio (VIR), this ratio is get utilised for ranking purpose as it helps in quantifying the amount of value created for per unit investment.
- The internal rate of return is the discounting rate that will make the net present value of a project equal to zero.
- Accounting rate of return is advantageous as it gives a glimpse of the profitability of a project. However, its main weakness is that it ignores the timing of cash flows making it an inappropriate approach to appraising projects.
On the other hand, the payback period is advantageous as it helps shareholders and the management estimate when the project will recover the invested amount. However, failure to take into account time value of money makes the method inaccurate.
NPV has two main advantages. First, it recognizes the time value of money of the cash flows leading to precise predictions. Secondly, the method takes into account the risks that future cash flows pose due to inflation. On the other hand, the method does not indicate how long it will take to generate positive cash flows, which is a major limitation. Likewise, the method assumes abundant capital that is always not the case.
Lastly, profitability index gives a fair view of the profitability of a project, which is its key advantage. However, the method ignores the time value of money thereby limiting its accuracy.
Comparison among the results of both projects such as:
|Basis||Project B||Project A|
|Payback period||2 years and 5 months||1 year & 6 months|
Decision: – By looking at the outcomes of the calculations it is analysed that Project A is much beneficial for the company as it attain high P.I as well as higher NPV as compare to the Project B along with this Project A is having much lower Payback period as compare to Project B that shows Project A is low risky project. So project A is suggested over Project B.
International Financial Reporting Standards seeks to make business language common to make it easy to understand and compare company accounts in different countries. Globalization of shareholding and trade has necessitated a common language as many companies are increasingly listing their shares foreign countries stock exchange market. Statement of financial position, Statement of Comprehensive Income, Statement of any changes in Equity, Statement of Cash Flows, and a Summary of important accounting policies are the five major financial statements required under IFRS (“IFRS”;” INTERNATIONAL FINANCIAL REPORTING TOOL”).
Following are financial statements of that IFRS has issued for the companies to prepare during each financial year.
in Accounting,balance sheet is an itemized statement of what one/business Owns,what one/business Owes and what one/busines is WORTH.
Balance sheet reports what a business owns(Assets,like supplies,cash equipments),what a business Owes(Liabilities,things a business Owes),Worth(Owner’s Equity,worth of a business)
it presents financial record of a company’s revenues,expenses,and profits over a given time period.it focus on revenues and costs associated with revenues.the operating section of an income statement includes revenue and expenses.the nons-operating section includes revenues and gains from non-primary business activities also expenses that are either unusual or infrequent,finance costs like intrest expense,and income tax expense.The income statement is one of the major financial statement used by accountants and business owners.it shows the profitability of a company during the time interval specified in its heading,it helps in identifying Risks and Opportunities and forecast future performance for Owners,Investors,Creditors,and Competitors.
3)Cash flow statement;
Cash flow statement is a statement of inflows and outflows(uses) of cash and cash equivalents. In an enterprise during a specified period of time.a statement of cash flows reveals the movements of cash of a business enterprise for the given accounting period indicating specifically how the cash was generated.it is required for short range financial planning.As per Accounting standard-3(revised)the changes resulting in cash inflow and cash outflow arise on account of three types of activities,
Cash flow from Operating Activities(cash receipts from sales,cash payments to suppliers of goods,etc).Cash flow from Investing Activities(this include the acquisition and disposal of long-term assets and other investments not included in cash equivqlents.the separate disclosure of cash flows arising from investing activities is important.Examples are cash payments to acquire fixed assets(incuding intangibles),Cash receipts from disposal of fixed assets(including intangibles etc)
Cash Flow from Financing Activities;the separate disclosure of cash flow arising from financing activities is important because it is useful in predicting claims of future cash flow by providers of funds(both capital and loan)to the enterprise.
Financing activities are activities that result in changes in the size and composition of the owners capital(including preference share capital in the case of a company) and borrowings of the enterprise.Examples are cash proceeds from issuing shares,cash payments of amounts borrowed etc)
4)statement of changes in equity;A Statement of changes in equity and similarly the statement of changes in owner’s equity for a sole trader, statement of changes in partners’ equity for a partnership, statement of changes in Shareholders’ equity for a Company or statement of changes in Taxpayers’ equity for Government financial statements is one of the four basic financial statements.
Mitevski discusses different changes in IFRS reporting standards effective from June 2016. First, Amendment to IAS 27 allows firms to use the equity method to report investment in joint ventures and subsidiaries. Likewise, an amendment to IAS 16 and IAS 38 clarifies applicable methods of calculating depreciation and amortization. Lastly, an amendment to IAS 1 raises the bar on disclosure initiative through emphasizing on materiality, eliminating prescribed order of notes, and clarifying disaggregation and aggregation.
Compare appropriate formats of financial statements for different types of business: –
Introduction: – There are different kind of business are running in the market as sole trader, partnership and company. All they have different types of format for preparing their financial statements and this differentiation is discussed below in the report.
According to reporting format stipulated in the Companies Act of 1989, R Riggs is a limited liability company. The Act specifies four profit and loss reporting formats that a company should adopt. R Riggs uses format one that requires companies to classify expenses into the respective categories such as sales expenses, administrative expenses, and cost of distribution as R Riggs profit and loss account indicates. Secondly, the company’s profit and loss account for depreciation, which is a major reporting requirement for limited companies. Lastly, the company’s balance sheet lists stock as one of its current assets. Only limited companies offer shares (Atrill and McLaney 121).
On the other hand, J & B Associates is a partnership due to three main reasons. First, the profit and loss account features interest on drawings that are only present in the partnership business. Secondly, the profit and loss account lists the profit shared by J and B. Lastly, the balance sheet lists capital contribution as shared between J and B.
Lastly, there is one more kind of business firm exists named as sole trader where single owner is performing all the activities like decisions, liable to liabilities and other factors. Owner is not liable to follow the set standards and for a record purpose they maintain two sided balance sheet. There are not so many stakeholders having interest in their respective activities and sole trader is only responsible for all the liabilities.
Conclusion: – It is concluded that different business firms need to act differently as company need to follow the set rules and regulation by the IFRS to prepare their financial statements, whereas partnership firm also need to do the same but sole-traders didn’t follow the same as they perform their functioning at very low level.
- Gross Profit Margin: – This ratio is calculated in order to measure the company’s financial health for earning revenues over their cost of goods sold.
Formula = Revenue- Cost of Goods Sold/Revenue
For R Riggs, Gross Profit Margin= (£157,165-£94,520)/ £157,165x 100=39.86%
The margin shows that the company retains only 39.86 percent of its revenues to finance its other costs and obligation. Therefore, the company profitability is relatively low.
For J&B, Gross Profit Margin=(363,111-198,581/363,111)x=45.32%
J&B is has a higher profitability as it retains 45.32 percent of its revenues to fulfil other fiduciary roles.
- Net Profit Margin: – This ratio shows the relationship among net profit after tax and net sales. It helps in measuring the profit earning capacity of the business firm.
Formula = Net Profit/ Sales Revenue
For R Riggs, NPM=(23,937/157,165)x100=15.23% . The margin shows that the company retains only 15 percent of its revenues as net income.
For J&B NPM=86,065/363,111=23.7%. It shows that J&B retained 23.7 percent of its sales revenue as net earnings.
- Current Ratio: – This ratio is utilised for measuring ability of company in order to meet out their short term as well as long term liabilities. Organisations current assets and current liabilities get utilised for this purpose.
Formula = Current Assets/Current Liabilities
For R Riggs, CR=18,874/5657=3.336
The ratio shows that R Riggs is financial sound as its assets exceed liabilities thereby the ability to meet short-term debts.
For J&B, CR=140490/72525=1.937
The ratio shows that J&B can is financially sound as its liquidity allows settling of its short-term debts.
- Quick Ratio: – This ratio is utilised for measuring the company’s liquidity and for the purpose of calculations stock or inventory get taken out from current assets.
Formula = Quick Assets/Current Liabilities
Quick Asserts=Current Assets-Inventories
For R Riggs, Quick Asserts=18874-2400-230=£16,244
Therefore, Quick Ration=16,244/5657=2.87
As such, R Riggs is highly flexible to cover its short-term debts as its huge movable assets with fewer liabilities.
For J&B, Quick Assets=140490-74210=£66280
Therefore, J&B have limited ability to service their short-term debts as current liabilities outstrip the company’s movable assets.
- Gearing: – It is the effective ratio that get utilised for describing financial ratio and for this purpose owner’s equity get compared with debt balance.
Formula = long-term liabilities/Total capital employed
Total Capital employed=Shareholders funds +Long-term liabilities
For plc. Gearing= (7,880,000/ (7,880,000+5,000,000)) x100=61.18%
- EPS: – It is referred as Earning Per Share. It is considered as an indicator of company’s profitability. EPS is the part of company’s profit that get allocated to the shareholders.
Formula = Net Income/ Weighted Common Share Outstanding
For plc, EPS=750,000/5,000,000=15p per share
- Dividend per share = It is that share of profit that get distributed among shareholders in the form of dividends on the basis of per share.
Formula = Total Dividends/Number of Ordinary Shares
For plc, divided per share =200,000/5000, 000=4p
- Dividend Yield: – It is such ratio that get utilised for expressing a percentage of a current share price.
Formula = Cash Dividend per Share/Market Value per Share
For plc, dividend yield=4p/80p=5%
- Dividend Cover: – It is also termed as dividend coverage. This ratio is utilised for measuring the company’s income over the paid dividend amount. In order to calculate ratio net profit or loss attributed to ordinary shareholders get divided by ordinary dividend.
Formula = Profit After Tax/Total Dividends Paid
For plc, dividend cover= 750000/200,000=3.75 times
- Earnings ratio: – It is organisational ratio of share price to its per-share earnings. In order to measure the P/E ratio market value of per share get divided by their earnings per share.
Formula = market value per share/Earning per share
For plc, P/E ratio=80p/4p=5
Briefly, Jane should consider purchasing plc shares as the company financial performance seems to head in the right direction. For instance, the company reduced its gearing from 68 to 61 percent, the earning per share increased by 3p to 15 p in 2015, and dividend per share rose to 4p from 3.75p. Likewise, the company’s dividend cover rose to 3.75 ties from 3.75 in the 2014 fiscal year. Likewise, P/E ratio quadrupled in 2015 fiscal year to 20 from 5 in 2014 fiscal year.
So it is suggested that Jane has to purchase the shares of the Staton Plc as it provide adequate returns over the invested amount.
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