The vast branch of Corporate Finance available to a business - Free Essay Example

Corporate Finance is a vast branch business management, which deals with the management of funds and capital arrangement. Corporative Finance as an immensely lucrative aspect that deals with helping business organizations manage money for various ventures, managing their assets, acquire other firms and make a robust financial planning for the future (Beaney, S., 2005.). It may have varied aspects though in course of business, depending upon place to place as per the finance faculty of the economy. For instance, Shaun Beaney, from ICAEW (United Kingdom) , describes corporate finance to be, associated in the UK with some degree of change of ownership in a business, connected to a corporate transaction that leads to the creation of a new equity structure or shareholder base, and the related issue, underwriting, purchase or exchange of equity (and related warrants) or debt (Beaney, S., 2005.). {Learning outcome 1} There are various principles to be considered while dealing with corporate finance. There are ample of decision making tasks that need to be dealt with. These may range from capital investment planning and decision, working capital decisions and management, financial risk strategic planning and its implementation (risk management), etc. The capital investment planning and decision further includes project valuation, flexibility valuation, identifying and categorizing uncertainties etc. there is immense requirement of an element to maximize the firm value. This may be served as a basic principle for corporate finance. The idea further expands as follows: The investment decision-making: The business organizations must realize that the investment grounds should qualify the question of giving returns which are greater than the minimum acceptable hurdle rate. Further, the hurdle rate should be higher for risk projects, and reflect the financing; whereas, the returns time weighed, cash flow based, incremental in nature and should reflect all side costs and benefits (Anon., n.d.). The financing decision making: The organizations must opt for a financing plan which can maximize the project value and match the assets being financed. Further, the financing mix must include both debt and equity and can influence the cash flow. (Anon., n.d.) The dividend decision making: The organization must come up with strict plans concerning dividends, in order to have satisfied investors and hence encourage further investments.. The basic idea should be that all investments must be cashed back to the owners if there are not enough investments that earn the hurdle rate. These are some of the basic principles and ideas that are important regarding the understanding and conceptual working know how of corporate finance. I, in an attempt to demonstrate the practical working of corporate finance, present the following report. In this report, I assume to be working as a corporate financier for the Wonderland Confectionaries Inc., who is working with his team to define structures of financial planning and analyze them for the new theme park venture that the organization plans to start. Finally we evaluate from the report, whether or not Wonderland Confectionaries Inc should undertake the investment in the proposed theme park. Qualitative Financial Analysis of the New Project {Learning Outcome 2 3} Wonderland has been a successful business leader in food and catering industry for a long period. The idea of coming up with an adventure- cum- theme park sounds thrilling, yet the outcomes may be unsatisfying or maybe financially dire, if the organization does not pay the required attention to all the aspects, be it terms of financial, social or management matters. We attempt to analyze the organizations proposal by predicting the outcomes after a comprehensive research of the organizations assets and by a comparison with the organizations closest competitor in theme park business -Alice Limited. Available sources of finance The organization must study all the alternative sources available which can fund the project and fill up the capital gap. Following may be the options available for the organization to finance the proposed business plan: Use of retained profit: The organization has a successful chain of restaurants with huge number of customers and a giant sum of turnover. The parallel business profit may be the most reliable and safe source of investment. Selling shares: this can be one of the most lucrative long term financial sources. The organization has a name in hospitality business and can flourish really well in the sister stream (i.e. the theme park business).This assurance and faith may attract healthy investments by adjoining shareholders. Bank loans: the organization m ay think of applying for bank loans besides the above mentioned options. With an impressive plan layout portfolio and affirmative risk management strategies and backups, the banks can lend the organization, an im pressive amount of loans. Generating increasing sales: with an increase in revenue such as service taxes, in the prevailing industries up to optimum levels, the organization can transfer profit benefit to the growing business. Organic Growth: this idea reflects the business to self fund. Although the idea may not be valid for the initial stages of the business, but is evidentially the most expansive financial source among all in later stages, in context of flourishing the business. {Learning Outcome 4} Assessment of economic worth of the primary finance options Now, that we have identified the prime and major sources of financial options available for Wonderland Confectionaries Ltd, we must assess the economic worth of each of these by understanding all the possible consequences of accessing these options: (Anon., n.d.) Use of retained profit: this factor must be given the highest rating among all the other factors that have been identified. This factor requires no payback. This makes it the most impressive option. Since Wonderland is a well established business enterprise serving millions of customers, the investments can be considerable enough. Hence, the net economic worth of this option is influential enough to be counted on the positive side. Selling shares: selling of shares is an essential and a vital source. It is a long term financial source, which shall be agreed on terms of sharing both, the profit as well as losses of the business. This guarantees minimal payback risk. Because of its reputation, the organizations new ven ture may attract huge investments through share-sales. Hence, this factor again is economically worth standing on the positive side for the new business project. Bank loans: this is an essential source that must be considered in order to get a large proportion of the business capital that is required. Although, there are payback risk factors. The organization, if , fails to successfully implement its business plan, or due to any hindrance, if the business plan fails, it may be a huge financial loss for the organization and may also ruin the social reputation. Although, through its vast experience in business, the enterprise has fair chances of implementing the business plan successfully. Also, through its bright reputation, getting bank loans for a new project could be easily manageable. Generating increasing sales value: this is another lucrative source of finance. But this may bring down the number of existing customers for the organization in the existing sectors. So it has less fairer economic benefit than the other options. Organic growth: growing the business is a desire for the organization. The organization will always tend to work towards expanding profit margins and sales. This, although cannot act as a funding source in the initial phase of the business, but can act as a tremendous source if the organization utilizes its profit returns in a right manner by maintaining their reserve. This, again is another beneficial economic aspect. Through the analysis carried out in the above section, we can support the Wonderland groups initiative to start the proposed business venture. Ahead, in this report, we browse some more aspects and dimensions concerned with the project in terms of corporate finance. {Learning outcome 5} Management of corporate finance The main objective of corporate finance system, as discussed previously is to maximize the value of the firm. An effective management corporate finance, involves comprehensive strategic planning and decision making processes to assign appropriate resources and hence achieve the main objective. The following fields of decision making are primary in this regard: Capital budgeting: this is used as a tool to assess what amount is to be invested on which resource by analyzing the worth of the investment, returns to be gained and considering the risk factors. The several aspects related to capital budgeting may range from net present value, modified internal rate of return, accounting rate of return, profitability index, equivalent annuity, etc. Financing: this aspect deals with a thorough analysis followed by a decision to decide whether a debt or equity fund may be invested in a particular project. The tendency is always inclined to maximize the value of the firm. Dividend Management: the financial managers must work on a well framed set of policies that govern the dividend returns to the shareholders. They must design appropriate and effective prediction schemes that can identify the cash overflow. Instead of unnecessary investments, the profit returns must be distributed among the shareholders as dividends. This will ensure healthy and continuous investment and increase the pool of shareholders, which will always strengthen the financial aspects. {Learning Outcome 6} Practical weightage of the theory We have seen different aspects of corporate finance in the previous sections of this report. The big question that pops up is whether or not these theoretical aspects are valid in the practical scenario. This is indeed a point to be pondered on. If we take a better look, theres no substantial guarantee that we can provide to support the theoretical aspects. The following points raise the concern: There have been incredible and unpredictable fiscal transformations taking around lately. For instance, the global fiscal crisis of 2001 and most lately the recent 2007 credit catastrophe, that shook almost the entire global economic world. This raises a concern for the validity of strategies, theories and policies that may be implemented to get the desired outcomes. Even a slight deviation from the implemented rules and regulations can cause stress for the organization and the new business project. These deviations may or may not be in hands of the authorities and management that mo nitors would monitor the implementation of the business plan. Yet, to stand against these concerns, there apparently are factors that may bring the weighing beam back to the central position: These theories have been developed and accepted by experts, belonging to this field (with great experiences), all over the world. These have been a standard practice in the field of corporate finance by numerous business organizations, old or ne, trying to set up new ventures or start new business projects. Hence, there is a little chance that these theories can betray the predicted outcomes. As per evidential records, which are countless in numbers, if an organization keeps a constant monitoring over the strategic plan implementation process and utilize the flexibilities therein appropriately, there are a little chances that any big time credit failure or economic collapse can hinder the prospects of success. Also, if the corporate financial management is experienced( which in case of Wonderland Confectionaries Ltd indeed is), one may claim the corporate finance theory a foolproof device for well and organized management of financial assets of the organization. Following the above discussion, our conclusion stays unbiased and neutral over the issue. Yet, the fast is that if the organization has a rigid vision to start work over the proposed project, it should protect its vision and work for it, making sure that there is minimal or no room for error. We see in the coming section how quantitavely valid are the chances for the organizations new project to succeed and meet all the demands. {Learning Outcome 7} Approaches to analyze corporate finance structures In this section, we will try to look into the analytical and quantitave aspects of the scenario and the financial assets and options available. We discuss the most basic approach to analyze corporate finance structures: {Requirement 1} Calculation of Net Present value (NPV) NPV is a method used in corporate finance to evaluate a rough figure representing a minimum gross return that an enterprise may get back after its investment in a new business project or venture. In a broad aspect, we may conclude that the calculation of NPV enables an organization to make a rough judgment over whether starting a new project will be beneficial or not. The NPV value is calculated by basic finance principles. If the calculated NVP value is greater than 0, then the business venture is considered worth investing in. But, if the NVP value sums up below 0 (i.e. negative), then it the venture is not worth the investment. We use this basic principle and the fact sheet that we gathered through our research about Wonderland Inc., to evaluate the NVP and hence predict roughly if the venture is worth the investment or not. From the firms investment manual, we have a set of predicted data. Net money to be invested, initially in construction of the theme park = GBP 500, 000,000. Let us assume a required rate of return to be 15% . We now calculate a net return (roughly, excluding the tax factors, etc.), as predicted in the investment manual. The firm expects 20,000 visitors per day for first five years, out of which 70% visitors would be children (fee charged = GBP 15) and 30% adults (fee charged = GBP 25.) Now, the calculated earning per day = GBP.(150,000 + 210,000) = GBP.360,000. So, net return after 5 years = GBP.(360,000 * 365*5) = GBP.657,000,000 Now, we evaluate the value of this return amount after 5 years from now, in the present date by using the present value table (valid for UK). For an ROR (required rate of return) of 15%, after 5 years, the interest factor in the interest table is 0.870 (Anon., n.d.) So present value of the return = GBP.(657,000,000 * 0.870) = GBP.571,590,000 Thus, NPV = GBP.(571,590,000 500,000,000) = GBP. 71,590,000 Clearly, NPV 0 In this calculation, we have considered only the capital required for construction purposes and have excluded the returns coming from all other entertainment fields except for the entry fee to the theme park. This calculation roughly states that after 5 years, the projected NVP is greater than 0. Hence as per the principles of study of NVP, it is safe and sound for the Wonderland Confectionaries Ltd., to start the proposed venture (Auerbach, R., n.d.) {Learning outcome 8} {Requirement 2} Suggestions for the Management of new project In this section, we make an attempt to offer some suggestions, both in terms of financial as well as non financial matters, which may be considered by the organization and management before starting the proposed venture. The suggestions we wish to offer are presented in the following points: The management and organization must identify all the practical financial sources and conduct a thorough study of the possible consequences and circumstances that may arise in course of progress of the implementation of the new venture. All the areas, social, public, financial, economical, etc., must be thoroughly researched and analyzed and the risk factors must be identified in order to plan all possible backups in case of unpredictable circumstances. The financial management teams must study all aspects of cash inflow and outflow to conduct a comprehensive analysis and forecast of the business situations that may arise. This must be inclusive of all factors such as corporate tax rat e, bank loan interest rates, insurance premiums, etc. The organization must take healthy but sensible competition with the closest identified rival Alice Limited. The organization, as primary and initial targets, must try to match and further, overtake the turnover figures achieved by the rivals, annually. This competitive environment and growth can affect the companys growth in an immensely elevating manner. {Requirement 3} Real time options for theme park project appraisal A report always tends to provide the reader with idealized theories, which may hold lesser relevance in practical life situations. The project appraisal, if taken closely, insists on discussing some real time possible events and strategies to be taken in some unwanted, unpredicted and uncontrollable conditions. Some major options have been discussed below. Abandonement: The very idea of abandonment was popularized by Peter Drucker. The basic idea revolves around the fact that there is no point wasting resources, energy and time on a project, if for a projected period of time, there are no desired outcomes. This assessment of projection and prediction must be done by the managers of the business organization. the Wonderland Co. are working on a big time investment project which may or may not give desired returns to the huge investment that may be put in. The organization must keep track of all events, compare the desired business outcomes with the actual ones and decide if the p roject is worth working on at every state on point until the targeted period. Expansion: This aspect again is of great concern. Once the business comes under profit, it will again not be a wise use of resources and reserves, if expansion possibilities are not explored. There must be constant attempts for exploration of all possibilities of expansion. The process again, must be carried out in a very flawless manner, ensuring to not harm the already safe business. Flexibilities: There must always be flexibility options in the project which could be accessible in times of over expenditure of assets, time, resources, etc. This can enhance the efficiency of the business and imparts profitability. The implemented strategies, while being planned, must be made flexible to accommodate new edited feature, when required. This may help to not reject the entire implementation system and make alternative changes, wherever and whenever required. Selling: Project selling is a process of po sitioning. It must be exercised when and wherever required by the fair involvement of both, the project manager as well as the team members. Conclusion: Wonderland Confectionaries Limited, being a successful business organization in the field of food and catering services, can indeed claim to come up with a successful implementation of the new business proposal. The theme park setup venture proposal can produce huge profits for the enterprise if all the aspects regarding corporate finance, strategic planning and implementation, risk management, etc., are comprehensively assessed.