Working capital and Management concentrate - Myassignmenthelp.Com

Question: 1. Discuss the different long-term sources of finance available to companies and theories that discuss their risk/return characteristics and optimum capital structure. With reference to the accounts then discuss the long term capital structure of the chosen company and what this may indicate about the companys attitude to risk. You may need to refer to the specific note in the notes to the accounts to get detailed information on this. Part of your answer to this question should include calculation of a suitable gearing ratio. 2. Discuss relevant working capital management theories. Then calculate suitable working capital ratios and discuss how efficiently the company is managing its short-term sources of finance. 3. Discuss the range of dividend policies available to companies, why certain companies may choose certain policies and what sort of dividend policy the directors of the company seem to be following and possible reasons for this. 4. Assess the profitability and risk of the company and how attractive it appears to be to potential investors, in doing so make use of market structure analysis internal to the industry. Your answer should include some evaluation of the type of external economic environment of the company and the business models used. Suggest how Minsky analysis can be applied to the company and market you have chosen. Answer: Introduction Apple Inc. Is a software and communication companies, which operates in various parts of the globe. The company was in a struggling position during the 90s era but it bounced back under the guidance of Steve Jobs (Hillier et al. 2013). In 1995, the company reported its first profits and paid its first dividends. The given report discusses the various financing aspects of the company and aims to address the various assessment questions. Discussion Answer 1 A business cannot run without finance. Many companies prefer to have long-term sources of finance as long term sources of finance need not be paid off immediately and can be utilized for the development of the business. There are various sources of long-term finance and they have been discussed below. Equity Shares A public limited company may raise appropriate funds from the promoters of the business or from the public. This can be done by issuing ordinary equity shares. The shareholders achieve ownership rights and tend to get dividends made on the profit of the company (Flannery and Hankins 2013).They tend to undertake the risk of the company. From the point of view of a company, this can be described as a good source of finance for the company. However, the shareholders tend to get involved in the decision making of the firm. However, this kind of financing can be considered a safe option, as the dividends need to be paid if the firm does not earn profit. The capital structure of the firm is divided into various classes of shares (Fracassi 2016).However, they are not tax deductable and this increases the tax expenses of the company. Preference Shares This is similar to the shares but they carry preferential rights. These rights means that dividends needs to be paid to the shareholders first and then to others. In case of winding up of the company, these preference shareholders are given their capital first. These are similar to debts but are not tax deductible. As there are no fixed charges involved the leveraging costs are, lower (Ehrhardt and Brigham 2016). One advantage of this type of share is that the shareholders do not have any voting rights therefore; the management interference is minimum in this case. Debentures Very often, the companies aim to acclaim finance for long-term purposes through debentures. Debentures also divide the capital of the firm into different debentures. The investors of the company can purchase those debentures and these debentures pay out interests. The interests can be paid out irrespective of the profitability of the firm (Vernimmen et al. 2014). The debenture holders may not have voting rights but they would surely receive their debt amount. The interest on debentures is tax deductable and this tends to save costs for the company. Retained Earnings These are the savings of the company, which tend to be used by the company for the welfare of the organization. Safest form of financing Long term Loans These are taken from various financial institutions, which then charge interest to the borrowers. The interest charged is tax deductable. This form also does not affect the decision making of the firm. The Apple Company follows both a debt as well as equity capital structure. The company has Long-term debts of $194714000 as per September 2017 and total equity of 134,047,000 The suitable gearing ratio for the company would be Debt to Equity Ratio, which measures the solvency of the firm and is calculated as total debt divide by total equity. The ratio has deteriorated from 2015 to 2017 (Moffett, Stonehill and Eiteman 2017). The Debt Equity Ratio is = 194714000/134047000 =1.5 This indicates higher rate of debt financing. Answer 2 Working Capital Management Working capital Management concentrates on the various issues that arise in managing the day-to-day transactions in the business. The main objective of the working capital management is to manage the current assets as well as the current liabilities of the firm in a way that the satisfactory level of the working capital is maintained. Theories of Working Capital Management Hedging Approach- In this approach the maturity of the various sources of the fund should match with the nature of the assets that need to be financed (Keen 2013). The hedging approach tends to suggest that there exists seasonal variations and that along with permanent financing, short-term finances should be obtained. Conservative Approach- In the conservative Approach, it is stated that the total funds requirement should be met by long-term sources whereas the short-term funds should only be used in cases of emergency. Aggressive approach- The aggressive approach states that a part of the permanent working capital of the firm can financed by short-term sources. This approach tends to minimize the excess liquidity while meeting the short-term requirements. Hence, the company needs to follow a suitable method of working capital and meet their own requirements accordingly. The primary working capital ratio is the current ratio, which can be calculated by dividing the current assets by current liabilities. Current Assets= 128645000$ Current Liabilities= 100814000$ Ratio = 1.2 The current ratio of Apple above average. The company is in a good financial position and it is being able to meet its current liabilities. The working capital of the firm is 128645000$-100814000$ =2783100$ It can be stated that the company has been managing its finances extremely well and that even after it pays all its liabilities it will easily be able to save a huge amount of money for its working capital. Answer 3 There are different kinds of dividend policies that are as follows: Stable dividend policy wherein the firms pay fixed sum of dividend and maintain this for all the times regardless of the different fluctuations in the market. This is advised that the companies must follow stable dividend policy wherein the stakeholders are assured to be given fixed rate of dividend per share. When the different earnings of the firm are rising at a regular interval there is satisfaction in the management and the earnings that are increased are sustainable in nature (Firth et al. 2016). Per amount of dividend is increased as well in correspondence with the fall in the price of the shares as well. Stable dividend policy fosters a proper rise in the value of the shares and the different investors pay higher premium to the different shares that promises certainty of the dividend income. However, in designing stable dividend policy, the future earning power of the firm has to be determined and the rate of dividend has to be fixed as well. Policy of no immediate dividend- This kind of policy requires huge amount of funds in order to finance the different programmes on expansion. When the access of the firms is difficult in the capital market and the availability of such funds is costlier in nature as well. Issue of bonus shares follows policy of no immediate dividend, as this will increase the capital of firm (Gopalan, Nanda and Seru 2014). Policy of regular extra dividends- The extra dividends are allowed only once in a year and the requirement of annual dividend will be exceeded by some given sum of amount. These kind of policies provide proper impression to different stakeholders the extra dividends are paid as the firms has outstanding earnings that will be skipped when the business will drop to normal level (Kajola, Adewumi and Oworu 2015). Policy of regular stock dividends- Wherein the firms who are following this policy pay the dividends in stock instead of cash and these are known as the bonus shares. These bonus shares are used to capitalize the reinvested earnings of different firms. Policy to pay irregular dividends The firm who follows such policy does not pay fixed amount of dividends and the share of the dividend varies in correspondence with the change in level of earnings. Firms with the unstable earnings adopt this policy and a large part of the entire profit may be ploughed back in the year as well (Floyd, Li and Skinner 2015). Dividend Policy followed by Apple Inc Apple follows the Stable Dividend Policy post 1995, as the company is paying stable and fixed amount of dividend regardless of any kind of fluctuations in the market. It has been seen that Apple Inc follows the stable dividend policy and the different stockholders of Apple Inc are assured of receiving fixed dividends per share as well (Apple 2018). The entire management of Apple Inc has tried their level best in maintaining the rate of dividend. Apple Inc follows the stable dividend policy as this policy helps in fostering a rise in the value of the shares. Answer 4 The economic factors, which are present in the external environment of Apple, tend to create opportunities for the firm in various fields. The external environment of the company consists of various inflation rates, exchange rates, fiscal policies and other factors that tend to influence the working of the firm. Most of the external environment factors tend to create opportunities for the firm (Apple 2018). The following are considered the most significant external environmental factors Rapid growth of developing countries (opportunity) Stable economies of developed countries (opportunity) The developing economies are growing tremendously. The income of the various groups present have been increasing and this tend The economic stability of most developed countries creates opportunities for companies like Apple to expand their businesses. However, the rapid growth of developing countries serve as an opportunity to the company who can then grow their market and adhere to the needs of the various users. This rapid growth of the company can be described as a calculated risk as it tends to have an impact on the share prices and in the same way be risky and lower them (Boyer 2013). Once the company is able to expand to the various countries then the profitability of the company will also increases. This increased profitability has a cyclic effect, which will then help the company to increase their share prices. The second opportunity lies in increasing the operations of the company in the developed companies. There are various opportunities available to the Apple In. in the developed country as well. It can customize its products and the software, which it offers, and thereby gain popularity. Apple Inc. has been reporting profits since a long time. Some of its activities can be described as risk taking but the decision makers of the firm tend to take calculated risks that then get returns for their risks, which have been taken by the company. Business Model Business model of Apple Inc. The business model of the Apple Inc. Is extremely simple. It is into app development, large publishing as well as content ownership. The company has costs like Research and Development costs, selling costs as well as Cost of Sales. The main market where the company makes maximum sales is in the phone market. Every year the company has been coming up with some new products that help it to increase the popularity all with the sales of the company (Richard, Stewart and Alan 2016). Application of Minsky analysis Minsky has defined that the three financial positions are present in any situation that tend to increase the fragility. These are: Hedge Finance: which refers to the income flows which are expected to meet the obligations related to finance every period Speculative finance- Income flows can only cover the interest costs hence the debt can be rolled over Financial Positions of a Firm Ponzi finance states that the earning of the company will not be able to cover any costs and is extremely low. The various companies often shift to these three phases of financing capabilities (Arnold 2013). The shift towards the Ponzi finance is unintentional. According to the analysis, which can be conducted after analyzing the financial reports of the firm, the company is currently in the Hedge Financing position where the earnings of the company will be able to cover all its costs. This is a good condition to be in and this shows that the stability of the firm is good and this increases the goodwill of the firm in the eyes of the investors. References Apple. ,2018.iPhone. [online] Available at: https://www.apple.com/iphone/ [Accessed 4 Jan. 2018]. Apple. ,2018.Investor Relations - Financial Information - Apple. [online] Available at: https://investor.apple.com/financials.cfm [Accessed 6 Jan. 2018]. Arnold, G., 2013.Corporate financial management. Pearson Higher Ed. Boyer, R., 2013. The global financial crisis in historical perspective: An economic analysis combining Minsky, Hayek, Fisher, Keynes and the regulation approach.Accounting, Economics and Law,3(3), pp.93-139. Ehrhardt, M.C. and Brigham, E.F., 2016.Corporate finance: A focused approach. Cengage learning. Firth, M., Gao, J., Shen, J. and Zhang, Y., 2016. Institutional stock ownership and firms cash dividend policies: Evidence from China.Journal of Banking Finance,65, pp.91-107. Flannery, M.J. and Hankins, K.W., 2013. Estimating dynamic panel models in corporate finance.Journal of Corporate Finance,19, pp.1-19. Floyd, E., Li, N. and Skinner, D.J., 2015. Payout policy through the financial crisis: The growth of repurchases and the resilience of dividends.Journal of Financial Economics,118(2), pp.299-316 Fracassi, C., 2016. Corporate finance policies and social networks.Management Science. Gheorghe, S. and Pipu-Nicolae, B., 2014. Financial Diagnosis Of Stocks.Annals-Economy Series,6, pp.60-68. Gopalan, R., Nanda, V. and Seru, A., 2014. Internal capital market and dividend policies: Evidence from business groups.The Review of Financial Studies,27(4), pp.1102-1142. Hillier, D., Ross, S., Westerfield, R., Jaffe, J. and Jordan, B., 2013.Corporate finance. McGraw Hill. Kajola, S.O., Adewumi, A.A. and Oworu, O.O., 2015. Dividend pay-out policy and firm financial performance: evidence from Nigerian listed non-financial firms.International Journal of Economics, Commerce and Management, pp.1-12. Keen, S., 2013. A monetary Minsky model of the Great Moderation and the Great Recession.Journal of Economic Behavior Organization,86, pp.221-235. Moffett, M.H., Stonehill, A.I. and Eiteman, D.K., 2017.Fundamentals of multinational finance. Pearson. Richard, A.B., Stewart, C.M. and Alan, J.M., 2016. Fundamentals of corporate finance. Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014.Corporate finance: theory and practice. John Wiley Sons.