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Critical Evaluation of Assumptions in Corporate Finance

University: MONT ROSE COLLEGE

  • Unit No: 7
  • Level: Undergraduate/College
  • Pages 11 / Words 2750
  • Paper Type: Assignment
  • Course Code: 7211AFE
  • Downloads: 5
Question :

Finance plays an important role in managing the activities of the business so that its operations are carried out smoothly. This project is based on understanding the importance of finance in business.

  • Understanding the concept of corporate finance
  • Sources of raising finance.
  • Considerations while opting for types of finances.
  • Concept of capital structure.
Answer :

INTRODUCTION

Corporate finance is a study of analysing the capital structure of an organisation which mainly helps to incorporate the funding and actions management to increase the value of the organisation (Subramaniam and et. al., 2011). There is a type of aggrievement, events and analysis done in respect of corporate finance activities as capital investments, capital financing, dividends and return of capital. Financial assumptions, literature, the objective of the organisation subject to maximising the wealth of shareholders are defined in this context. Various external sources of finance available to the company and source of finance are clearly identified in this context. Possible consideration that is taken into account by the management and the type of finance. Relevant considerations explained and placed clearly in the context of business circumstances. The concept of the weighted average cost of capital theory and practical problems are encountered for the company.

TASK 1

Critical evaluation and justification of assumptions in corporate finance

Corporate finance include the funding actions which are taken by management for wealth increase and finance to maximise the value of a business through planning and implementing management resources while balancing risk and profitability. It mainly deals with the procedures and the management aspects which remain associated with management of funds and investment dealing. it includes the tools and utilise financial resources. Main objective of corporate finance is to maximise the value of entity through planning and utilising management resources while balancing risk and profitability. Major three activities are as

Capital investment

There is a particular process is done in this activity as deciding the project to be acquired for further process, earning the highest possible risk and adjustment returns.

Capital financing

How capital fund investments are optimised subject to growth and development of organisation. Effectiveness and sustainability of financing investments are measured in this activity.

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Dividends and return of capital

This activity helps to identify that how much return will be generated by the selected capital investment plan.

Overview of organisation

GAMMA communications Plc is a cloud communication service providing organisation which operation mainly two operating segments indirect and direct (Huang and Kisgen, 2013). In indirect division traditional and growth products to channel partners are considered and the direct channels contains Gamma's traditional and growth products to end users in the small and medium size enterprise. Both the enterprise and the public sectors work together in this section and associated with the services wrap. Operating segment is engaging to sell a combination of traditional products and services.

Communication channels, traditional products and services, revenues remain divided rental for wholesale lines and growth products. Voice system and hosted inbound products and services are the main products of the company. Gamma is one of the rapidly growing technological organisation that is also providing and exploring the communications services the UK market. Gamma's services as cloud PBX, inbound call control services and SIP trunking are the essential aspects considered in designing to meet. Voice data and mobility requirements of the business through the exploitation and own intellectual property.

Organisational goal in terms of wealth creation of shareholders

Main objective of Gamma Communication plc is to be a credible and effective communication channels and building strong customer base. Effective financial decision making is essential requirement to understand the goal and the objective of organisation. Business decisions which are attainable in terms of owner's perspective. It is very important for organisation to maximise the health of shareholders. Wealth of shareholders mainly depends upon the market price of shares and value of business in the market.

Present value of the investments defines the value of investors and shareholders of organisation. Expected returns on the investment is the main element which remain associated with dividend policies and periodic payments (Flannery, 2012.). The concept of wealth maximisation not centralised around the enhancement of value of share holders but also maximising the value of present capital investments. The actions which remain active in term so of attaining the results are not taken in regular course of action.

There are some critical aspects are considered in terms of managing the strategies and investment funds in different sections. Social responsibilities and concerns are sorted out with effective implementation of wealth maximisation strategies and plans. These strategies centralised around some specific aspects as to sustain an optimum return on investment for stockholders, to be perceived by customers as a provider of quality service, to demonstrate employees are out for most of the valuable resources, to corporate leadership programs to the communities. Compatibly with environmental standards and initiate programs that are sensitive to environmental issues are also considered in this.

TASK 2

External source of finance available to the organisation

Source of finance defines the availability of financial resources to execute the functions and operations of business in effective and efficient manner (Hillier and et. al., 2014). There are two type of main source of finance remain available to the organisation as long term source of finance and short term source of finance. Internal source of finance is the type of source of finance which are generated by self capital generation power and capacity.

Source of finance also remain bifurcated on the basis of time duration. External source of funding mainly helps organisation to fulfil the long term finance requirement for business these are defined as follows;

Long term source of funding

Sustainable development and long term success is one of the prime objective of business and organisations. For long term success and accomplish long terms objective of organisation, long term finance requirement occurs with in organisation for a periodic basis. Mainly long term finance requirement of business associated with fulfilling the capital requirement for more than 5 years like 10, 15, 20 years or depends upon various factors. Long terms financing mainly fulfilling the capital requirements as fixed assets like plant and machinery, land and building etc. this also remains the part of working capital which permanently stay stable in the business for a long duration.

Debentures: These are considered as a type of debt instrument which contains secured by physical assets or collateral. Debenture is a long term debt tool which is used by large corporations to generate funds at a fixed rate of interest.

Preference capital or internal accruals: Preference capital is one of the essential source of capital which is used to wind up of company and dividend payments. The share capital of organisation divided in small share which is called as preference share capital and the person who retain the preference shares are considered as preference share holders.

Share capital or equity shares: This is one of the external source of finance which fulfil the capital requirement of organisation by issuing share capital. Person who retain the equity shares are called as equity share holders.

Term loans form financial institutes and banks: This is mainly associated with providing long term financial requirement to organisation. There is a interest paid by the organisation to bank at a particular rate of interest.

Venture funding: This is one of the source of funding which provides funding facility and services to small entities and start up ideas (Ehrhardt and Brigham, 2016.). It is important to generate the funds for execute and operate the operations and management with in the facility by adopting plans.

Short term source of financing

To accomplish short targets and objectives organisations are required to have financial resources for a short term duration. Short term finance not remain more than 1 year and the short term finance mainly arises to finance the current assets of an organisation (Dewally and Shao, 2014). Short term financial resources helps to fulfil the requirement of purchase of inventories, payment of short term liabilities and credits, repayment of bank overdraft and maintaining the minimum cash balance requirement. There are type of short term short financing are defined as follows;

Trade credits: This is one of the essential tool which helps in financing growth and development. Trade credit mainly extend suppliers who let how buy and pay later. There are some valuable aspects are ash the spot the trade credit. There are also some credit policies are provided by organisation as cash on deliveries or cheque on deliveries.

Short term loans: There are type of financing needs are fulfilled by taking short term credits and loans form small financing institutions and bank loan. These loans are ordinarily contains flexibility to repay with in the stipulated tenure (Frino, Hill and Chen, 2015).

Working capital form commercial banks: This source of funding mainly helps to defined the working capital requirement and analysing the feasibility of star up products. Working capital financing is rapidly growing at initial level of exploring and improving the structure of business.

Advanced received form customers: This is also one of the type of source of financing which helps to elaborate the financing problems and managing the compatibility

TASK 3

Considerations to be taken in to account by the management while choosing type of finance

Effectiveness and evaluation of financial plans is the key responsibility of managers and the accountants in terms of short term and long term objectives of business. Proper evaluation and control is required to evaluate and define the problems in effective and efficient manner. Moreover these plans and strategies are associated with long term effectiveness ad plans in order to determine the risk factors.

Gamma is one of the growing communication organisation which mainly associated with providing the communication services in the UK. For providing cloud PBX services and inbound call control services and SIP trunking (Denis, 2011). This mainly associated with meet increasing complex voice, data and mobility requirement. As per organisational need it is seen that organisation need both the short term source of finance and long term source of finance. It is required to analyse the effectiveness of finance plans.

There type of ways are considered while implementing business objectives and goals of organisation in effective manner. A wide range of lenders and investors to adopt when the business owners make the financial decisions. It is important to critical evaluate the sustainability and long term affectivity about the choosing investment plan. There are type of consideration to be taken by Gamma communication plc when choosing the type of finance. Few are defined as follows:

Repayment terms

Proper analysis of legal terms, repayment policy, rate of interest, penalties and charges in condition of not paying interest and loans in time. It is require to analyse the finance requirement first that how much finance requirement and needs are required to execute and operate the functions of organisation without having any extra cost of operations (Conyon and He, 2011). Longer loans are build up with a significant amount of interest considered for short term required and larger periodic payments. Amount off the periodic payments and how often which remain required to pay. It is also required to choose a systematic method of repayment of loans and advances so that payment procedure would not impact the overall repayment structure.

Interest and fees structure

It is important to analyse the pre expenses and structure of organisation financing method before decision making and financial analysis approach. Overall cost and charges must be included before making financial decision and investment strategies and plans. There are some common cost and basis expenses are considered while making investment plans and the structure of effective plans as interest rates, organisational fees and broker's fees. Financing through investment can also one of the evaluation method which may lead the organisation towards the sustainable development and growth of organisation. There are type of cost drives and different cost sections are defined in this context which mainly helps to divert the plans and objectives in more strategic and effective manner.

Financing requirements

This is one of the essential aspect that analyse the use of capital funds and reserves in such a manner so that effective investor places on applicants are analysed in this context. It is important to pursue financing from sources whose requirement and specific financial ratios test such as debt to equity or interest coverage application package. This mainly associated with analysing the further financial requirement which occurs after completing the financial sections and variations in policies and plans.

Additional requirements

This consideration mainly associated with financing the business through the investment and look into all the ramifications of your decisions before moving ahead. Venture capital mainly associated with ownership and plans to stake in the organisation (Calomiris and Herring, 2013). It is expected that organisations which mainly associated with accomplishment of long term growth and development of organisation and developing plans and structure for deriving strategies in a parallel form.

As per above defined considerations Gamma communication plc may lead its operations and management with effective growth and development plan. Majorly there are some key financial aspects are considered in it to consolidate the information and plans effectively. The investment plan is expected to develop and developed in terms of sustainable growth and development of investing and effective strategies and plans are synchronised in more summarised manner.

TASK 4

Weighted average cost of capital to evaluate the the straightforward theory in difficult in practice

Weighted average cost of capital

There are type of financial challenges and problems are faced by organisers and managers of an organisation as evaluating the cost of capital structure, cost of lost inventories, cost of stocks and shares in stock and value of equity share capital and cost of earning price per share. Weighted average cost of capital mainly helps to elaborate and analyse the further analysis of finance for executing the financial plans and strategies.

Effective management decisions and plans are the main source which helps to collaborate and synchronise the requirement of finance and analyse the further finance requirement to executing the functions of business (Brealey and et. al., 2012). This is one of the essential aspect in terms of managing the deliration on the WACC. This is one of the effective method which helps to calculate the cost of capital in terms of capital containing the stock, preferred stock and bonds which mainly helps to analyse the long term debt.

Weighted average cost of capital is evaluated as per following formula;

WACC = k e ( 1 − L ) + k d ( 1 − T c ) L

There are type of financial challenges was faced by Gamma communication plc while investing in innovations and improvements in communication channels. Direct benefits and communications are analysed in terms of providing a zero debt capital structure. There are some external charges and the plans are evaluated in terms of debt capital. Trade off is one of the essential element in terms of expanding the business structure of business as reduced cost of capital. Zero debt can alleviate some kind of risk associated with company and obligations but automatically develop the financial strength and outstanding Findings.

Debt funding was also one of the major issue which was occurring in equity to lower interest cost on debt (Wilson, 2016). Lenders were required to capital management and in addition there are higher claims and management requirements were considered at cheapest level and managing the competitive edge. As per analysis of trade off worth it is analysed that organisation is growing at faster rate which was measured in terms of gaining the interest of customers and gaining the interest of customers.

There are type of investing activities also considered in terms of explaining the business structure of determining the existing structure of organisation in terms of dealing the financial challenges (Kaplan, 2013).

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CONCLUSION

As per above defined report, Corporate finance is an investigation of examining the capital structure of association which for the most part fuses the subsidizing and activities administration to build the estimation of the association. There are kind of oppression, occasions and examination done in regard of corporate fund exercises as capital ventures, capital financing, profits and return of capital. Monetary suspicions, writing, target of association subject to expanding the abundance of investors are characterized in this unique circumstance. Different outer wellsprings of back accessible to the organization and wellspring of fund are unmistakably distinguished in this specific circumstance. Conceivable thought that are considered by the administration and the sort of back. Important contemplations clarified and set unmistakably with regards to business conditions. Idea of weighted normal cost of capital hypothesis and useful issues are experienced for the organization.

REFERENCES

Books and Journals:

Subramaniam, V. and et. al., 2011. Firm structure and corporate cash holdings.Journal of Corporate Finance. 17(3). pp.759-773.

Huang, J. and Kisgen, D.J., 2013. Gender and corporate finance: Are male executives overconfident relative to female executives?.Journal of Financial Economics. 108(3). pp.822-839.

Hillier, D. and et. al., 2014.Fundamentals of corporate finance. McGraw Hill.

Ehrhardt, M. C. and Brigham, E. F., 2016.Corporate finance: A focused approach. Cengage learning.

Dewally, M. and Shao, Y., 2014. Liquidity crisis, relationship lending and corporate finance.Journal of Banking & Finance. 39. pp.223-239.

Denis, D. J., 2011. Financial flexibility and corporate liquidity.Journal of corporate finance. 17(3). pp.667-674.

Conyon, M. J. and He, L., 2011. Executive compensation and corporate governance in China.Journal of Corporate Finance. 17(4). pp.1158-1175.

Calomiris, C. W . and Herring, R. J., 2013. How to Design a Contingent Convertible Debt Requirement That Helps Solve Our Too‐Big‐to‐Fail Problem.Journal of Applied Corporate Finance. 25(2). pp.39-62.

Brealey, R. A. and et. al., 2012.Principles of corporate finance. Tata McGraw-Hill Education.

Wilson, N., 2016.ESOPs: their role in corporate finance and performance. Springer.

Kaplan, S. N., 2013. CEO pay and corporate governance in the US: Perceptions, facts, and challenges.Journal of Applied Corporate Finance. 25(2). pp.8-25.

Frino, A., Hill, A. and Chen, Z., 2015.Introduction to corporate finance. Pearson Higher Education AU.

Flannery, M.J., 2012. Corporate finance and financial institutions.Annu. Rev. Financ. Econ.. 4(1). pp.233-253.

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