Accounting and Finance for Managers (Research Paper Sample)

Accounting and Finance for Managers Name of Student Institution Accounting and Finance for Managers Task 1 In this case study, Jute Plc intends to finance the development of a revolutionary new product which it plans to enhance its competitiveness in the economy. Jute plc only relies on two available options. The options available for the company are equity financing and debt financing. To start with, there is a financial connection between profits and funds for Jute plc investment. Jute plc markup and investment plans are inextricably linked—in one direction or the other, and perhaps in both. Thus, the mark up plans should be strategic in order to provide a clear vision of how the company’s capital structure should be planned in order to effectively realize the desired goals for investing in the underlying investment. In this case, the ‘leveraging effect’ is necessary in the creation of a financing structure of Jute plc. Furthermore, it is not an easy task for the company’s management since many factors have implications on its operations. Such factor comprises of price factors, as well as, efforts to eliminate liquidity from the available capital sources. With regards to Jute plc, the revolutionary new product will either be financed by equity or debt-financing option; this will depend on management’s discretionary decision, however the underlying features for these options are having already been analyzed. Equity financing Equity financing has become more and more important especially in difficult situations for instance in the elimination of credit capital in the economy, and the continuous strengthening of competitiveness as well. Hence, in Jute plc, equity capital provides reference to the company’s long-term capital. As such, it doesn’t have any set period for refund as it applies to the credit capital. According to Bossert “the issue of the long duration that equity capital takes implies to a company’s security, that is, in the case of Jute plc, and its esteem creditors” (p. 4). As the company is currently being funded by £500M equity financing, the additional equity to finance the investment will mean that the company’s liquidity will be affected in the long run. Unlike the case of debt capital, the interest rate to be charged to the invested amount as it is not legally binding or they have no legality of being repaid in a stipulated time period. As such, the 6% coupon interest available to the Jute’s investment cannot be applicable and it will only increase the amount for instance in debt financing. Return based on equity financing is paid as dividends; consequently it only depends on the profitability and growth of the business operations. Indeed, the management of Jute plc will not be under pressure to repay the amount that was raised by the investors when investing on the £100M revolutionary product but will have to delay the re-imbursements until the investment reports a growth. In regard to the underlying project, Jute plc management’s scrutiny on the reliability of the project and the need to select the financing option articulates to the financial well-being of the company. For instance, where the company is not able to effectively repay the loan plus interest accrued will advertently lead to equity financing. In the case of Jute plc, the company had realized Earning before Interest, Tax, Depreciation and Amortization (EBITDA) of £110M and the available cash that was generated from the operations being £100M implying that raising equity of £100M for financing the operations will make the company forego a certain percentage of the business operations to the investors. Generally, equity financing is considered sometimes appropriate in financing Jute plc’s investment as the finances are always geared towards the business and the projects they are meant for. Individuals intending to invest in the company may achieve this through their businesses basing their attention on revolutionary new product, when the business is performing well either through flotation in the stock market or when it is valued by new investor who wants to purchase it. The investors that were preoccupied with the company’s investment in the new product will ensure that they offer valuable contacts, skills and experience to Jute plc with an aim of ensuring success of the business. Such a strategy will enhance the realization of the strategic goal for the company and in turn increase the revenue outlay, as the investors are known to have a vested interest in the operations of the business through profitability, value increase and growth. However, Jute plc management should analyze the financing option’s drawbacks. In reality raising equity financing is always demanding, time consuming and costly. Business operations of the company may ultimately suffer as the managerial team devotes most of its time to equity financing deal. The potential investors will be able to access the private and relevant information that are not intended to be exposed to the public— scrutinizing the financial statements and forecasts of Jute plc by probing the management team. This will expose Jute plc to unintended rivalry and competition from the close competitors as their strategies will be exposed to them. Equity financing projects are dependent on the ‘common mid’ in decision making. The management depended on the existing investor will ultimately make the management loose a certain amount of power they are vested with in making relevant decision concerning the new product. Debt Financing Debt financing is another option that is available for Jute plc to finance its operations. Debt is considered to be the total of finances acquired through borrowing from an outside source whereby the promise is the return of the initial principle with the accrued interest thereon. Although debt is perceived to possess negative connotation, new ventures and organization usually rely debt financing to fund their operations. Indeed, the most “healthy” balance sheets have always reported debt in their financial statements. Jute plc can rely on this financing option of the revolutionary new product. Currently the management is being financed by debt of £200M and upon incorporating another investment, it will push up the interest that will be charged on the amount borrowed. However, this option of financing an investment has numerous benefits to the management of Jute plc. It ensures that the shareholders of Jute plc are maintained by the current management. In the case where the amount is borrowed from lending institutions like bank, Jute plc will only be obligated to make payments up to the agreed period of time. Upon completion of the payments, the management has the right to run the business undertakings on the way it wants without any interference from the outsiders. In addition, the payments that are made on the business loan; that is interest and principal, are considered being business expenses and are deducted from the taxable income of the entity. This will increase Jute’s Earning after Tax (EAT) hence enhancing their profitability in the economy. Despite these advantages that surround the financing strategy of Jute plc, the option has its underlying drawbacks in the realization of the strategic goal and overall success of the entity. The repayment of the debt is constant and cannot be altered to suit the entity’s needs. In the case where Jute plc’s performance is at stake, the payments of interest accrued and principal should be met in due course. As such, where the organization is declared insolvent, the claimants will be prioritized in regard to the equity investors. Even though, the option may report a lower discounted interest rate, Jute plc will be faced with an increased interest rate which is dependent on the change in the economy. The macroeconomic conditions prevailing in the economy will ultimately have an impact on the interest rates, Jute’s history with the financial institutions, and the entity’s credit rating. Jute plc is currently having a debt financing of £100M which it is re-servicing, addition of another credit will mean that the credit rating of the firm by the financial institution will be lower. Levering up increases the risk of the financial institutions or the lender and with the available EBITDA of £110M, Jute plc cannot effectively re-service the debt that it aims to undertake. Currently Jute plc is generating cash flows of £100M and this will is not sufficient when repaying the debt. Jute plc needs to ensure that it generates sufficient amount of cash from its operations before the repayment of the loan commencers. The capital structure of Jute comprises of the long-term financial sources incorporating long-term assets and stocks that are preferred and earnings retained. When the company need additional funds for such things as acquisitions, new product offerings, and to enlarge their market share, Jute will have to shift to capital markets. The stock market refers to capital market, as well as the bond market. Thus in equity financing Jute Plc will be able to access the stock market whereas for debt financing, firms shift their attention to the bond market. In debt financing, the advantages include the ability of a firm to maintain the overall control of the business enterprise and the accrued interest over debt financing which is taxed, however, it faces some setbacks in that much debt can make Jute Plc to encounter problems when it begins to depend on it so much and lack revenues to offset the debts. Furthermore, if Jute has too much debt, this will mean that it become unattractive to investors due to the belief that the company will be at high risk. In the case of Jute Plc, equity financing will be emphasized since the company’s management will have no worries concerning the traditional ways of repayment. This is because when J...