FINANCIAL company needs to raise the equity

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FINANCIAL MANAGEMENT:

 

1)

I have considered and taken into account of the balance sheet of the company Apple. According to the question, I have to calculate the equity of the company, analyzing weather the company needs to raise the equity funds or not. Considering the balance sheet of Apple, the total assets that the company holds are $334,532 and the total liabilities of the company are $200,450. To calculate the equity of Apple we need to deduct the total liabilities from the total assets which gives us $1,34,082. As of April 1, 2017, the cash and cash equivalents is around $15.15 billion and short term marketable securities is about $52.94 billion, all accounting to the total of $101.99 billion worth of current assets. Analyzing the balance sheet, I found out that the amount due to be paid to the creditors i.e. the current liabilities is $73.34 billion, so paying off their liabilities won’t be a problem for the company. This concludes that Apple Inc. is a well-equipped and well-managed company with the current assets more that the current liabilities along with huge cash reserves. (Apple.com, n.d.) I think at the moment the company is stable in its management, by issuing the common shares the company dilutes the voting rights to the investors; when the company is doing well, the investors want the proffered shares because of their relative stability which is a benefit to the investors, while by issuing preference shares the company will also benefit as they will not be diluting the voting rights along with financing their equity for new projects.

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2)

Interest rates are some of the most influential components of any economy and they are really a matter of supply and demand. Choosing both fixed rate loans or floating rate loans is a complex task and a deeper analysis should be done before making a valid decision. Fixed rate loan can be termed as the loans in which the interest rate will remain the same throughout the entire term for which the loan is issued. In some occasions, it can be of huge advantage but the borrower can also end up paying more than what’s needed. While on the other hand floating (variable) rate loan can be termed as the loans whose interest rates fluctuate significantly particularly when it is a case of long term loan, depending upon those set nationally. Let’s understand the advantages and disadvantages of both of these types of loans. Fixed loan can be easily understood and the costs can be factored all times during the loan term. This can be advantageous when loan term loans are considered as the fluctuating interest rates might result in a paying a substantial amount of money than required. On the other hand, prediction is a false comfort when the fixed rate loans are taken into consideration. Also, these types of loans are less customizable with highly expensive breakage clauses. On the other hand; floating rate loans can be cost efficient than fixed rate loans as the interest rates tend to drop. These types of loans are also flexible and can be adjusted depending on how the borrower needs it. The main disadvantage is it is difficult to predict the amount of money we might have to give to the lender as the interest rates are fluctuating. When it comes to the company taking a floating loan of £10 million at the initial rate of 9% over the term of 5 years will be £207,583 per month, it is really a gamble. In the UK; the Bank of England raised its interest rate for the first time since 2007 from 0.25% to 0.5%.If the company takes the loan right now, the advantage is that they will have enough cash for their expansion but the major disadvantage of taking this loan at this point of time with a  floating rate over the term of 5 years can lead to huge amount of losses to the company during repayment of the loan during the term as the economic condition of the UK is very unstable due to the Brexit vote. (Inman and Partington, 2017).

 

In the context of Eurobonds; they are all about organizing the cheapest way for a company to arrange its borrowings. The advantage of issuing Eurobonds is that they are not subject to any taxes but there is a risk of exchange rate. A Euro dollar is a dollar which is sitting in an account which is not in its home country. Let’s say for an example a company based in the UK wants to borrow money in dollars, but the company is going to raise the dollars in any place of the world apart from the US. So, all the three components of the bonds are different, the issuer, the currency and the place where the money is being borrowed from. The advantage of issuing Eurodollar bond is that the company has the rate fixed at 8% over the term of 5 years which is beneficial and different to the floating rates of the bank loan. The monthly payment with this type of loan would be around $304,146. The disadvantage of this is that the company might end up paying more money to the firms from which they have borrowed the money from as the Eurodollar rate is fixed at 8%.

 

When we consider the case of a convertible bond; these can be classified as the corporate bonds that gives the liberty to the investors to convert to a set number of shares of the issuers common stock. As there is a potential of growth in these type of bonds, the coupons will be relatively lower than that offered for a similar bond which is non-convertible. The company will benefit from issuing the convertible bonds as they have comparably lower interest rates, which reduces the amount the company will have to pay to its investors which reduces the debt upon conversion when the bond matures. The major disadvantages the company will have to face is that the sizeable number of the simultaneous conversions could impact not only on the earnings per share, but also will affect the voting rights that come along with the common stock ownership. I think that issuing the convertible bonds will come with huge risks as the bond is not immune to the market risks and looking at the global economies and markets being unstable the convertible bonds worth £10 million with a yield to redemption of 6% with a conversion premium of 15% looks risky.

 

Management Accounting:

 

1)

Absorption costing is a method which is used to calculate the cost of a particular product by taking into consideration the direct costs along with the overheads. On the other hand; marginal costing is a technique which is used for the purpose of decision making. It consists of two costs, direct cost (variable cost) and fixed cost. The difference between both type of costings is; for marginal costing the costs applied on inventories are the variable costs while the fixed costs are ignored. While fixed overhead costs are applied under absorption costing. When it comes to profitability, marginal costing will show higher profits for each individual sale whereas with absorption costing the profit seem to be lower comparatively. But the profits will be similar in the long run for both of them. The contribution margin is used by the marginal costing which tends to exclude the applied overheads, whereas the gross margin which includes the applied overhead is used for absorption costing.

Let’s take an example:

 

 

 

 

 

 

Ex. A bottle manufacturer produces bottles and sells them. He produced and sold 30,000 units of the product in June 2017.Prepare income statements for June 2017 by using marginal costing and absorption costing.

Selling Price (Per unit)

$30

Direct Materials Cost (Per Unit)

$6

Direct Wages (Per/Hr.)

$9

Variable manufacturing overhead (Per unit)

$2

Variable Selling Exp. (Per unit)

$4

Manufacturing Overhead (Fixed)

$120000

Dist. and Admin. Costs (Fixed)

$50000

Direct Manu. Labor (Per unit)

20 min

 

 

 

Soln :-

                  Marginal Costing Income Statement

                                    (June 2017)

                                                                                         $                                                   $

Sales revenue

                                                   900000

Marginal Cost:
   Direct:  Materials
                  Labor
   Variable Prod. Overheads
   Variable dist. and admin. Exp.

 
180000
90000
60000
120000                                     (450000)             

Contribution margin:

                                                   450000

Fixed Costs:
      Manufacturing Overhead(Fixed)
      Selling and Admin. Costs

 
130000
50000                                        (180000)

Net Profit

                                                    270000

 

 

          

 

 

 

 

 

 

 

 

 

 

      Absorption Costing Income Statement

                                    (June 2017)

                                                                                         $                                                   $

Sales revenue

                                                   900000

Marginal Cost:
   Direct:  Materials
                  Labor
   Variable Prod. Overheads
   Fixed Manufacturing Overhead

 
180000
90000
60000
130000                                     (460000)             

Gross Profit:

                                                   440000

Admin. And Dist. Costs:
      Variable
      Selling and Admin. Costs

 
120000
50000                                        (170000)

Net Profit

                                                    270000

 

 

3)

Budget variance can be defined as a periodic measure used to differentiate between budgeted and actual figures quantifiably. Positive gains or variance is referred to be favorable, whereas negative variance leads to losses and shortfalls and is unfavorable. (Investopedia, n.d.)

 

 

Budget

Price per Unit

Flexible Budget

Production Cost (Actual)

 

         £

          £

          £

          £

Sales

40000

40

44000

44400

Volume

1000

 

1100

1100

Labor (direct)

13000

13

14300

14513

Material (direct)

12000

12

13200

13455

Variable Cost

25000

 

27500

27,968

Fixed Overhead

5000

 

5000

5700

Total Cost

30000

 

32500

33668

 

 

 

 

 

Net Profit

10000

 

11500

10732

 

 

 

 

 

 

The variance would be 30000 to be subtracted from 33668 which would come around              – 3668. This is a negative variance. The negative variance suggests that it is an unfavorable budget variance which lead to the losses and shortfalls.

A Flexible budget is a budget that flexes if there is any change in the volume of activity. It is better than a static budget which remains constant. (AccountingCoach.com, n.d.).

Cost Control can be improved along with the performance management with the use of flexible budget. It compares the budgeted costs along with the actual costs for the same output levels. These all will lead the company to identify the budget variance.

 

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