a) & c)
The liquidity ratios show that the company has got the ability to pay off the short-term liabilities from its current assets. The current ratio and the quick ratios are both satisfactory and show the liquidity situation of the company. The decrease of the Current, Cash and Quick ratios is due to the heavy investments in the research and development .
The profitability ratios show that the company is earning above average returns. The brand Apple is known globally and the customers prefer the brand instead of others. The gross profit margin showed an increase in the year 2014 due to the increase in sales revenues for the company and the pre-tax profit margin remained the same. The return on assets and equity has increased which shows the effectiveness of the business in utilizing its assets and equity .
The debt ratio has increased which shows that the company is capable enough to pay off the total liabilities from its assets. The company has gathered a lot of success due to effective utilization of these assets. The debt to equity ratio showed an upward trend illustrating that the company is using more debt to finance their operations. High debt situation is not fruitful and shows risk.
The operating performance ratios were derived to analyze the performance of the business, the fixed asset turnover fell from year 2013-2014. This showed that the performance with regards to the fixed assets decreased where as the working capital and the working capital ratio were satisfactory. The company was able to manage and created the balance between the current assets and the current liabilities .
b)
Apple Inc. is one of the leading companies in the global market, the company successfully launched the Macintosh in 1984. It was the time when most of the people were unaware of the computers and did not knew how to use it. The company knew the importance of the invention and carried on with improving the product.
The organizational structure adopted by the company was a unique collaborative structure. The company did not establish any committee and all the employees were free to share their ideas. The founder of the company "Steve Jobs" knew believed that new innovations and ideas could be developed and further polished to form new innovations in the future. The company also followed the accounting standards to maintain their financial activities and carried out their operations on the same grounds. Apple Inc. uses the "Generally Acceptable Accounting Principles" (GAAP) for their financial statements.
The innovations require participation of the employees in the operations of the business and therefore other organizational structures are not welcomed in the organization. The employees are given the opportunity to share their ideas directly to the upper management.
d)
The investor that has an amount of £ 50,000 = $ 78,735, must invest this amount in the stocks of a company, the company's dividend per share amount is higher than that of the interest payment paid by the bank. The reason behind paying higher to the shareholders is that the stock market is risky than the banks. The investor would be able to earn quickly on his investment and the s
e)
The choice of the source of finance basically depends upon the nature of the business and the size. Small organizations cannot avail the opportunities of financing provided to the large organizations. The company can simple add finance by continuously investing in the business from the amount of savings or retained earnings. Small company owners ask for investments from their families and banks on the other hand the large organizations can finance their business through huge bank loans, Equity financing (selling shares to the general public) and short term credits from the suppliers .
The most effective source of finance is the equity financing in which the owner through selling off the shares to general public invests all the money. The finance must be gathered from selling the share till the amount of £500,000 is gathered from the general public. The other option is that the company uses both the sources (i.e. Equity and Debt financing). The bank and the remaining by the sales of shares would borrow half of the money.
f)
The company can manage their working capital by keeping adequate on-hand cash for the purchases, pay offs, leases, utilities and other operating costs. The firms must invest in marketable securities, which could be included as cash and cash equivalents. The company must have access to credit in the time of need, the advantage of having credit is that the company can pay it off in future time. The company can also adopt the invoicing system, these invoicing systems would help the company to pay for their purchases within 30 days of the invoice and will have cash in hand for that particular time .
Comments on Budget and Cash flow Forecast
The income statement of the company shows the signs of positive growth in the first three months after which there is sudden decline expected in profits. The profits for the September were $16000, which decline significantly to $5000 in October followed by loss in December of $2000. The reason behind the decline in profits is the prevailing economic recession expected in the last quarter of the year due to which sales of the company are expected to decline. The company should review its marketing policy and pricing decisions in the last quarter, which may boost the sales and avoid the long-term losses.
The company should take certain cost control measures in order to avoid the losses in recessionary periods. Salaries and wages are the company’s largest expenses and it should review whether they could be reduced by redundancy or some other measures. The company should also review the electricity expenses budget since it is the expense, which is increasing despite of the decline in the operating activities. The company manages other expenses and overheads satisfactorily and their budgeted figures are realistic and achievable.
The cash flows of the company are expected to remain positive throughout the last half of the year but there are high expectations of the seasonal fluctuations. The first four months are expected to generate high cash inflows and the net cash flows are expected to remain high and positive. The only considerable amount of expenditure made in the third quarter was of the vehicle, which was purchased by the company for $25000. The payment is to be made in September, which will decrease the net cash flows probably to the negative point. However, the closing balance is expected to remain same and the company will still be able to repay the loan amount of $135000 to the bank in the month of November.
The cash flow forecasts and budget are made for the normal economic conditions and does not take into consideration the economic recession, which is now expected to hit in the last quarter of the year. The company may face the considerable shortage of cash inflows and the sales of the company may be different and lower than predicted in the budget. The company should therefore revise its budget and cash flow forecasts, which should reflect the true economic conditions that are expected to prevail in the country.
In order to avoid the negative cash balances at year end and the losses, the company should delay the payment of loan by the mid of the next year. The company should also obtain further short term financing from financial institution to manage its working capital in the last quarter when the sales are expected to decline. Delay of loan repayment and obtaining short-term loans will help the company in managing its finance and will ensure the smooth flow of cash.
In task 3, comparison of two projects was to be done by calculating Accounting rate of return (ARR), Payback Period, Net Present Value (NPV) and Internal Rate of Return (IRR). For the completion of the task the data related to the two tasks were provided. With the help of Initial investment, expected annual profit (loss), salvage value and cost of capital we were able to find out the financials tools that were required for both the projects. From the financial analysis tools it is easier for an individual to take a proper decision relation to a new project. The results of both the projects are determined below.
Accounting Rate of Return
After making an investment, the amount of profit or return that an individual expects is the Accounting Rate of Return. Average profit divided by initial investment results in ARR. By finding out the ARR of a project it is easier for the investor to understand which project will be more beneficial and helps in taking correct decision.
While computing the ARR of both the projects it is observed that the ARR of Project 2 is higher than that of Project 1 which indicates that investment made in Project 2 will derive more output than Project 1. ARR of Project 1 is 43 % and of Project 2 is 45 %. It can be said that investing each dollar in Project 2 will give them a return of 45 cents, which makes it better than Project 1. On the basis of ARR, the investor must invest in Project 2 because of higher expected returns.
Calculation for Depreciation
Payback Period
At the time of making an investment, the investor is also concerned about the length of time, which will be required to recover the cost of the investment made. With the help of payback period, the investor comes to when the cost of the investment will be recovered. Shorter periods of paybacks are desirable for the investors because once the cost of the investment is recovered, the investment will start earning profits. Payback Period is an important determinant because it allows the investors to take a better decision in a better investment on its basis.
After calculating the Payback Period for both the projects it is analyzed that payback period of Project 1 is 2.204 and that of Project 2 is 2.2154. It is indicated from the results that the payback period of Project 1 is lower than Project 2, which means the investor is more likely to invest in Project 1 as it is more desirable.
Investors use the financial analysis tool of Net Present Value to analyze the profitability of the project. NPV is used in capital budget and with its help, an investor is able to make decision about the investment on a project. It is basically the difference between present values of cash inflows and outflows over a period of time. To find out the future value of cash flows is a difficult task because of the change in the value of money. The element of discount rate while calculating NPV makes this tool the most appropriate tools to measure the future cash flows.
Internal Rate of Return is another financial analysis tool, which is used in capital budgeting to analyze the profitability by investing in a project. While comparing the IRR of two projects, the project that leads to higher IRR is most desirable by the investor because it depicts that the project with higher IRR will give more return in the future.
Conclusion
List of References
AppleInc., 2014. Form 10-K. Annual Report. California: Apple Inc Business.
Bose, D.C., 2010. Fundamentals of Financial Management. Delhi: PHI Learning Pvt. Ltd.
Debarshi, B., 2011. Management Accounting. Delhi: Pearson Education India.
Papadopoulos, P., 2011. Investment Report - Fundamental Analysis/ Ratio Analysis: Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group. Munich: GRIN Verlag.
Preve, L. & Sarria-Allende, V., 2010. Working Capital Management. Oxford: Oxford University Press.
Rigby, G., 2011. Types and Sources of Finance for Start-up and Growing Businesses: An Instant Guide. Massachusetts: Harriman House Limited.
Sagner, J., 2010. Essentials of Working Capital Management. illustrated ed. Hoboken: John Wiley & Sons.
