Managing Financial Resources and Decisions

Managing Financial Resources and Decisions Table of Contents Introductions-------------------------------------------------------------------------------3 2.1 a) Calculation for the Cost of Ordinary Share Capital----------------------------3 2.1 b) Calculation for the Cost of Preference Capital---------------------------------3 2.1 c) Calculations for the Cost of Debenture Capital after Tax---------------------3 2.1 d) Calculation for the weighted average Cost of Capital of the company------4 2.2 Importance of the financial planning------------------------------------------------4 2.3 Informational needs of Directors, Senior Managers and Junior Managers-----5 2.4 Impact of the financial statements--------------------------------------------------6 Bibliography---------------------------------------------------------------------------------7 2.1 Introduction The financial Report is provided by Brian Harris Chartered Accountants to assist our client, X Limited, in understanding the results of financial condition and operations calculated in order to facilitate better and more effective decision making. 2.1 a) Calculate the cost of Ordinary Share Capital: Dividend Growth Model: Po = A£2 = 200 p Po=market price for each share Do = 10 p Do= Company payment g =8% = 0.08 g= growth rate in dividend 2.1 b) Calculate the Cost of Preference Share Capital: Pp = A£ 1.20 each Dp= annual dividend of preference share Dp = 12 % = 12/ 100 =0.12 Pp= market price of the preference stock Kp= cost of preference share capital 2.1 c) Calculate the Cost of Debenture Capital after tax: I = 10 %= A£ 1, 000 I= interest rate Taxation= 20% t =taxation Pd = A£125 Pd = price of debenture Kd= cost of debenture capital after tax 2.1 d) Calculate the weighted average cost of Capital of the company:

	MV (market value)	CDC %
OSC (Ordinary share capital)	2000 x 2 =4000	13.40
PSC ( Preference share capital)	1000 x 1.20 = 1200	10.00
D (debenture)	125% x 1000 = 1250	6.40
COC (cost of capital)	6450

WACC= WACC= 2.2 Importance of financial planning The financial plan is considered by all marketers the cornerstone or the spine of the business, without the company cannot run properly and profitably. So there are some important points that need to be followed to understand why the financial plan is important and how it helps the business. First of all, a plan is put in place in accordance to the goal the business has set and is working to reach those goals. For instance, the income in the business can be administered better, between the tax payments, any expenditures and even savings. The cash flow can be controlled and budgeted properly in the business’ favour. A raise of the cash flow means a raise of the capital; that will help with investing in the business to increase the financial situation of the business. With an appropriate financial plan, proper investments can be chosen to adapt to the tasks and goals of the business. Also, the investments are useful for educational reasons, can be used to train the staff, or in times of emergency. The financial plan needs to include: a completed and up-to-date balance sheet, income statement and cash flow forecast; without all of those, the business will not be able to persuade any lender for a loan or any other financial assistance the business will need in the long-term. Secondly, the financial plan helps the business to determine the assets that can become a worry in the future because of the liabilities they come with. The assets are very important for the business; they can determine the solvency of the company. In the third place the financial plan that includes a proper insurance coverage is a worry less for the owner’s family protecting their investment. All the saving, created because of the good planning, can be benefic in crucial times. To put together a proper financial plan, the business owner should seek guidance and assistance from a financial advisor, who will assess the financial situation of the business and can evolve a strong financial plan that should meet the business’ objectives and goals. 2.3 Informational needs of Directors, Senior Managers and Junior Managers The executive of the company, responsible with the strategic and tactical management of the business is formed by the directors, senior managers and junior managers. The director (or directors of each department in a large company) is responsible with the strategic management. He needs large amount of information from a broad range of sources: markets, products, competitive environment, supply chain, new technology on the market, and about personnel and Human Resources, ready for a very good decision making. The director must acknowledge what information or raw data is needed to rule efficiently the company. Senior managers are responsible with the tactical management in the company, monitoring operations and finances. There are five demanding areas that are in the senior managers’ attention:

• The public policy perspective- related with informing the stakeholders and public about the important issues of the day
• Client perspective-related with people that sponsor work in the company, or those that make arrangements about pilot projects, researches and other type of projects, and how to meet their expectations.
• Internal business perspective- refers at managing successfully any activities based on communication with staff, researches conducted in the company.
• The Innovation and Learning perspective- refers at the training the staff should take to reach the skill level that is in accordance with the company’s policies, to work efficiently, and how to overcome the cultural barriers in the company, by building the inclusive culture.
• The Financial Perspective – refers at the rising funds that are imperative to support the researches are made by the company, and controlling and managing in an efficient way the company’s resources.

Junior Managers are part of the projects and support their senior managers in their operational responsabilities, collecting data and analyse the results, handling interviews with clients from inside the company, presenting the analysed results of the collected information in front of the project manager and the whole team; they can even lead projects when they have the necessary experience. 2.4 Impact of finance on the financial statements Financial statements make the support for understanding the financial position and performance, and also the liquidity of a business. They are considered like a map that gives a good direction to achieve the objectives of the business, and also to attract new investors. Financial statements refers at: income statement, balance sheet, cash flow statement, statement of changes in equity, an annual report, a 5 years report and summary of financial data, financial report, stock prices, auditors’ report, accounting policies, management discussion and analysis, just to name the most important ones. The business must collect correct financial information, must process it in different financial statements and then issued them regularly to the investors of the company. Because it has a huge impact on the future of the business, all the information in the statements must be accurate. Financial statements can have a radical effect on the Stock Price. The investors take the information released on the financial statements and make assumptions about their investment decisions. Depending how the information on the financial statements is presented, the Stock Price can go up or down. A dramatic effect the financial statements can have on the Financial Decisions, on how easy is for the business to get financing. The lenders want to invest in the businesses with good figures, so they look at the financial statements before they lend money to the company. If the financial statements are not favourable, the effect is negative, resulting in no loan borrowed by the company. Good figures in the financial statements will attract New Investors. They are interested in new shares of stock issued from the companies with very good earnings. After a thoroughly examination of the financial statements, the new investors can determine if is a good investment to put money into a company, or not. Bibliography https://www.agualtiplano.net/the-financial-plan.php https://www.blueshorefinancial.com/ToolsAdvice/Articles/FinancialPlanning/TenReasonsWhyFinancialPlanningIsImportant/ https://www.ukessays.com/essays/finance/sources-of-finance-and-impact-on-financial-statements-finance-essay.php https://smallbusiness.chron.com/impact-financial-statements-23794.html https://gbr.pepperdine.edu/2010/08/what-directors-need-to-know/ Carmen Parolea-MogaPage 1

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