OFFERS Buy 4 assignments and get 1 absolutely FREE!
Search

Financial Information for Business Decisions

University : UKCBC College

  • Unit No : 9
  • Level : Undergraduate/College
  • Pages 15 / Words 3250
  • Paper Type : Assignment
  • Course Code : JNB518
  • Downloads : 2149
Question :

Financial data plays a crucial role in assisting management to formulate an effective decision for the betterment of the business. You are asked to produce a report highlighting the importance of financial information in framing appropriate decisions and plans. For this, the following learning outcomes needs to be addressed:

  • Apply theories and models highlighting the role of financing data in business decision-making.
  • Determine a critical approach to the use of financial theories and models in evaluating corporate finance structure, decision making and budgets to support business strategy.
  • Examine the benefits of different kinds of financing for business decisions along with their impact on company’s corporate financial structure.
  • Explain emerging themes and issues in performance measurement.
  • Demonstrate key principles, trends, and global issues in accounting and corporate finance.
Answer :

INTRODUCTION

Successful business decision depends upon financial information and data which defines the financial position and profitability position of organisation. Decision making plans and search results mainly assist the structure of business to explore and manager the uniqueness of business for management research (Hair Jr and et. al., 2015). There are some assumptions and concepts are considered in financial planning and decision making process. This report defines the strategies, theories and concepts which are used to assist business decision making. Financial analysis of data and for evaluating the business proposals, critical approach to use financial models and theories of corporate finance defined in this context. Evaluation of corporate financial structure and decision making and budget to support decision making illustrated. Synthesise and discussion of emerging themes and issues are analysed parallel to

TASK 1

Financing the theories and models to business decisions the analysis of financial business

Management decisions and evaluation theories mainly associated with framing the financial growth and development plans. There are type of economic theories which mainly based upon optimum position and maximising the magnitudes revolution which mainly associated with analysing the trend and evaluation of financial theories. In this synthetic world of economic model, imagination of new business depends upon sustainability and reliability of financial plans. These are the main theories and aspects considered essential in terms of managing and deriving the strategies in the direction of effective use and analysis.

Financing theories and models provide a path to assist the decision making and strategic planning procedure there are type of financing theories exist and followed by finance managers in financial planing (Laudon and Laudon, 2016). Some of the major financial theories are described as follows:

Modern Portfolio Theory

It is a mathematical frame work which consolidate and assemble the assets and compare the expected returns parallel to market risk. This theory is beneficial for investors in terms of analysing the associated risk and uncertainties. Overall analysis based upon the capital and financial structure of organisation. This is one of the essential financing portfolio theory which mainly associated with analysing the market position and market cap for the existing business and organisation. This theory diversify the management risk and extend the diversification in investment and the ideas form different task. Financial assets are measured with the possible risk factor. This analysis majorly affect the returns and contribution which is made by organisers for developing market cap. There is a proper use of price variances done in this approach which also works as a proxy to the plans (Cassar, Ittner and Cavalluzzo, 2015).

MPT theory assumes that capitalist are risk averse which defines the associated risk with returns. It is considered that investors attracts towards the investment plans and offers that contains lesser risk and high returns. This is the main reason which increased the fluctuation rate and compensate the expected return. As per this theory an investor who wants higher returns should adopt the investment proposal contains lower risk. The rigorous trade off remains same for all investors but it differs as per the expectations and assumptions of different investors. Trade off differently based upon individual risk aversion characteristics. This theory contains following formula as

Expected return = E(Rp) = ∑ wi E(Ri).

Where Rp is the return on the portfolio, Ri is the return on assets I and wi is the weighting of component assets.

Tobin Separation Theorem

This theory also roams around the risk and returns for potential investors. This theory is separated in two major parts, one is find the efficient portfolio of risky assets and second is the optimum fraction to invest in the efficient portfolio of risky assets and the risk free assets. Main objective of this theory is to derive the risky portfolio to risk free portfolio. This theory mainly helps to confined tangent slope, maximum slope and optimum portfolio choice and expected utility maximization. As per Tobin it is required to choose the same portfolio of non safe assets regardless of how risk averse. If an investor wants to change the risk portfolio then it is required to change the amount of the safe assets. This theorem contains two main mean variances as one is there is no risk free assets and second is one risk free assets (Chen and et, al., 2014).

In no risk free assets

The market cap and analysis calculate with the matrix algebra as σ2 and the variance of the portfolio return which is denoted by μ defines the level of expected return upon market portfolio. r is considered as a vector of expected returns on the available assets and X is considered as an amount to be placed in the available assets, and W is considered as a wealth to be allocated in the portfolio. The overall theory works around minimising the return variance to a given of expected portfolio return can be stated as

XT r = μ and XT 1 =W.

In One risk free asset

When there is a one risk free asset remain available then two find separation theory applies, but in this case the funds might be chosen to be a very simple funds which contains the risk free returns only. The other funds can be chosen to be one of the zero holding of the risk free assets. Thus, mean variance efficient portfolio can be formed as accumulation of holding of the risk free assets and holding of a particular efficient fund that contains only risky assets. It can be set up as follows:

Minimising σ2 subject to (W – XT1)rf + XTe = μ

Equilibrium Theory

This is the theory which is a macroeconomics theory which contains how supply and demand of an economy affect the current market position and interact with dynamically and eventually in an equilibrium of prices. It explains the behaviour of demand, supply chain and the price with several market. As per modern concept of this theory the general equilibrium is remains associated with the commodities bifurcated as per price and demands. This model was developed by Kenneth Arrow, Gérard Debreu, and Lionel W. McKenzie in the 1950s. As per investor's perspective this theory provides an overview of different commodities and plans with return and associated risk (Frias‐Aceituno, Rodríguez‐Ariza and Garcia‐Sánchez, 2014).

Arbitrage Pricing Theory (APT)

This is also one of the general theory of asset pricing which contains the expected return of a financial asset. This theory is formed as a linear function of various factors and market indices which remain changes in each factors. This also represented by a factor specific beta coefficient. This model is considered as an alternative version of capital asset pricing model. As per assumption under arbitrage pricing theory return on assets remain dependent on type of macro economics factors as inflation, exchange rate, market indices, production measures market sentiments, changes in interest rates and movement of yield curves. This model also remain helpful for investors which estimated required rate if return in risky securities. APT considers risk premium basis specified set of elements in extra to the correlation of the price of the asset with expected extra return on the market portfolio. There are three major assumptions are considered in this approach which are as follows

  • Principles of capital market efficiency and all market participants trade with the motive of profit maximisation.
  • It adopts no arbitrage exists and is this occurs then participants will pursue the benefits out of and bring back the market equilibrium levels.
  • It contains the market frictions and there are no transaction costs and taxes are short exist when infinite number of securities remain available.

This theory helps to bifurcate the aim of investment plans with the limitations of one of the factor model and CAPM that provides different sensitivities to different markets. It is calculated by following formula

Arbitrage Pricing Theory Formula = E(x) = rf + b1 * (factor 1) + b2 *(factor 2) + ….+ bn *(factor n)

The Efficient Markets Hypothesis

This theory provides a vast overview and analysis about the market Hypothesis and EHM definition which mainly helps to determine and standardise the price of securities as stocks, commodities and securities. It is considered that the amount of analysis can give an investor an edge over other investors. EMH does not require the investors to be rational which acts randomly in the market as always (Edwards, 2014). There are type of forms contains in EMH as

  • Weak form EMH: It is advised that as per the past information about fluctuations and variation in the price of securities. Investor with information to produce return which involves in market average in the short term. There is no any specific form is made in terms of assisting the structure and form of business at next level. The fundamental analysis provides an overview rather than a clear picture of analysis.
  • Semi strong Form EHM: In this form the fundamental analysis provides an advantage of new information which instantly priced in to securities.
  • Strong Form EHM: In this form the information remain related with both private and the public, in to stock and no any investor would become eligible for capturing abnormally high returns which outlines included in the average.

TASK 2

Critical approach to use the financial theories and models in the analysis of corporate finance

Capital structure theory which is also one of the common structural theory plays vital role in making capital structure and planning. This theory also considered as a Modigliani and Miller approach. This approach defines the structure of organisation and provides a critical factors remain associated with analysing the financial plans and making strong capital structure. This approach owes 2 main components of organisation one is equal mix of both the debt and equity. Main objective of this approach is to elaborate and consolidate the capital structure of organisation in different forms. It relates the financial leverage of organisation with the organisation's debt equity position and market value of organisation (Cassidy, 2016).

Modigiliani and Miller approach

This approach was introduced in 1950s subject to analyse the capital structure of business and approaching and resemble the net operating income approach. It advocates the capital structure and irrelevancy theory. It helps to evaluate the value of organisation with the capital structure of organisation whether it is in highly leveraged or has a less debt component in the financing mix. It has no bearing on the value of a firm. This defines the rate of fluctuation in existing market of organisation and assist the financial decision of the firm. It is an organisation which contain high growth prospect with the market value which remain higher stock price which remain high in various forms. Organisation has been analysed in terms of attractive growth and development rather then a great market. This approach contains some certain assumptions which are as follows.

  • There is no tax rates
  • Transaction cost for buying and selling securities as well as bankruptcy cost remains nil.
  • There is a proportion of information that contains an investor will have access to the same information would and investors would behalf rationally.
  • Cost of borrowing must be remain same from investors perspective.
  • Debt financing does not affect the companies EBIT.

This approach mainly assist the investment decision and helps finance managers to make dividend policies and management strategies for effective management plans.

TASK 3

Analysis of financial statements for Bathroom outfitters Ltd

a) Key ratios analysis

Profitability ratio: This is the ratio which relates the sales and gross profit of organisation within organisational context. With the help of these ratios managers be able to understand that how much gross profit is earned by organisations for a particular time duration. It is utilized as suitable measure which an organisation used to decide general adequacy and profit they are producing for add up to deals and speculations (Storey, 2016).

Gross profit margin: this is calculated with following formula as per financial financial statement of Bathroom outfitters statements gross profit margin for the year 2017 was recorded as £115210 and sales for the year 2017 was made £350328 and Gross profit for the year 2016 was recorded as £123276 and sales for the year 2016 was recorded as £369557.

Gross profit / Total sales

Net profit margin: As per financial statements of Bathroom outfitters the net profit was recorded as £23822 for the year 2016 and net profit was recorded as £18,735 for the year 2017. it is calculated as per following formula: Net profit / total sales.

Ratios

2017

2016

Gross profit margin

(115210 / 350328)*100 = 32.88%

(123276 / 369557)*100 = 33.35%

Net profit margin

(18735 / 350328)*100 = 5.34%

(23822 / 369557)*100 = 6.44%

Liquidity ratio: this ratio mainly defines the liquidisation position of organisation. It is one of the viable financial position related examination that is being utilized to inspect an organizations general capacity to make payments of daily expenses and liquid expenses. Mainly, the most extreme estimation of proportions, the larger will be edge of security that an organization have to cover mid term liabilities.

  • Current ratio: this is the key ratio which defines the relation with the current assets and the current liabilities of the organisation in terms of managing the daily operations and functions in a smooth way (Soomro, Shah and Ahmed, 2016). This directly affect the process of decision making. This is calculated by proportionate of current assets and the current liabilities. As per the financial statements of Bathroom outfitters has current assets of 482795 for the year 2017 and 420037 for the year 2016.
  • Liquid ratio: this is one of the essential aspect in terms of managing the functions and operation which fall upon same day. As per above analysis there are some essential aspect considered while calculating the liquid ratio which is only consider those items which are in core liquid nature. This is calculated as by proportionate of liquid assets and the current liabilities. Organisation has a liquid assets of 195000 for the year 2017 and 129081 for the year 2016.

Ratios

2017

2016

Current ratio

(482795 / 100294) = 4.81

( 420037 / 108998) = 3.85

Liquid ratio

(195000 / 100294) = 1.94

( 129081 / 108998) = 1.18

Debt equity ratio: This ratio mainly defines the debt equity position of organisation that how total liabilities and the shareholders equity are capable to maintain the capital structure of organisation (Beshears and et. al.,2015) . It mainly correlate the relation between the total debts and loans taken by organisation and total share holder's equity. This is calculated as per following formula;

Total liabilities / Total shareholder equity

Ratios

2017

2016

Debt to equity ratio

234909 / 405034 = 0.5799

261770 / 609137 = 0.42

As per financial information given under financial statements of Bathroom Outfitters the total shareholder's equity fund was given for the year 2017 and 2016 was £405034 and £609137 subsequently. It is seen that the debt equity capacity get increased in comparison to last financial year.

Assets turn over ratio: This is the ratio which mainly defines the relation between the total assets and the sales of for the year. As per analysis of financial statements of total sales for the year 2017 and 2016 was recorded as £350328 and £369557 subsequently and the total assets are calculated as £639943 and £609137 for the year 2017 and 2016 subsequently. This is calculated as per following formula = Sales / Average Total Assets.

Ratios

2017

2016

Assets turn over ratio

350328 / 639943 = 0.547

369557 / 609137 = 0.606

b) Analysis of working capital requirement which affect the decision making

There are type of factors affect the decision-making in terms of managing the working capital requirement and liquidity. There are type factors affect the concept of maintaining the working capital requirement (Epstein, 2018). Evaluating the rate of interest in terms of evaluating the sustainability and analysing the cost effective factors with in the organisation.

Management of current assets and current liabilities is one of the major element considered to maintain the level of working capital requirement. Debtor management which mainly remains involve in managing the balance and requirement of business effectively and adequately. Interest rates also affect the decision-making. Management of current assets in order to fulfil the requirements of working capital management is the main objective which elaborate the essential aspect to determine the cost.

c) Evaluation of Customers, competition and change in international business environment

This mainly helps to derive the functions and the business environment in terms of evaluation of customer competition and change in internal business process. Adequate financial position of organisation affect the business process which mainly associated with analysing the market plans (Drexler, Fischer and Schoar, 2014). Internal business environment mainly depends upon the formation of task and project subject to define retain the reserves and surplus for the year relevant financial years. Profitability plays vital role in terms of exploring the business structure and base of business at next level.

d) IFRS 16 and IFRS 17

As per the case scenario, kitchen warehouse ltd the currently has 35 million in operating lease agreements for the next 5 years and there is an analysis done subject to analyse the potential aspect for budgeting and publishing the data related to financial planing.

IFRS 16

This is one of the important financial rule which mainly associated with management, recognising, measures, present and disclose lease agreements. The standard provision of IFRS provides a single lease accounting model and requiring leases to recognise assets and liabilities for more than 12 months. The main objective of IFRS is to establish the principles for the recognition and presentation of leases and ensure the transactions.

IFRS 17

This financial reporting standard mainly associated with analysing, measurement and analysing the agreements and contracts related to contracts. Main objective of IFRS 17 is to managing the insurance contracts with respect of standards (Yakovleva, 2017). There is a use of financial information and support of financial records of organisation taken to assist the financial plans. Financial position subject to equity share holders, equities, reserves and cash flows are the essential aspect to elaborate the financial standards.

Importance of IAS:

International accounting standards are the global accepted guidelines which are followed by every organisation, these standards plays significant role in an organisation which are mentioned below:

  • These standards facilitates an organisation by providing transparency in accounting practices which ultimately results in efficient flow of capital. Fair financial statements helps investors and other related parties too.
  • These standards are globally accepted due to which financial statements which are prepared using IAS can used for international business purposes also. It facilitates with the ease in understanding accounting reports.
  • These guidelines improve quality of financial reporting systems.

CONCLUSION

As per above report it is considered that how financial information and data affect the process of financial decision-making and strategic planing. By implementing the financing models and theories can be implemented and solve the financial issues and enhance the stakeholders interest towards investing with in the organisation. By adopting the financial approaches and models for financial data for assisting the business decisions are defined in this context. A critical approach mainly helps to determine the essential aspect in terms of maintaining the adequate capital structure and financial performance measurement. How financial issues and conflicts can be operated by implementing the financial rules and international accounting standards.

Download Full Sample
Cite This Work To export references to this sample, select the desired referencing style below:
Copy to Clipboard
Copy to Clipboard
Copy to Clipboard
Copy to Clipboard
Assignment desk. JNB518 [Internet]. Assignment desk.(2020), Retrieved from: https://www.assignmentdesk.co.uk/free-samples/jnb518-financial-information-for-business-decisions
Copy to Clipboard
Boost Grades & Leave Stress

Share Your Requirements Now for Customized Solutions.

Lowest Price
USD 7.03

Delivered on-time or your money back

100+ Qualified Writers

For Best Finance Assignment Help

View All Writers
FREE Tools

To Make Your Work Original

  • Plagiarism Checker

    Check your work against plagiarism & get a free Turnitin report!

    Check Plagiarism
  • Reference Generator

    Get citations & references in your document in the desired style!

    Generate References