A Study On Advanced Financial Management Business Essay

This report has been intended for module tutor. It's been asked to handle research into the financial management issues that contain to be taken into account when raising finance. The purpose of this report is to critically examine why and exactly how companies issue shares and measure the investment appraisal techniques available. Finance manager will also provide recommendations to the module tutor on matters concerning raising finance, issuing shares and investment appraisal decisions. References are given according to Harvard Referencing System.

3. Research Methodology

Different data collection tools and techniques are considered. Fast but cheap methods are applied to obtain maximum information in little time. Specific but relevant research is focused to minimize collecting irrelevant data and save time. Journals and books are the back-bone for the literature. Library catalogues and indexes are used to scan for secondary data. Journals and newspaper articles, books and magazines are searched online as well as in the library. It is ensured that the procedures adapted are relevant, systematic, justified and appropriate. The researcher also ensured that the study conclusion is viable and verifiable. The study findings are examined for reliability and validity.

4. Introduction

The finance manager is responsible for the finance function of a business like the investing and financing decisions (Why and what for the company needs finance and where it can boost finance from). A finance manager needs to assess sources of finance based after criteria: sum of money required, how quickly it is necessary, the least expensive option available, amount of risk involved, the price of finance and the time of the necessity. The finance manager can boost finance internally from the company's cashflow or externally from the administrative centre market. A finance owning a company is one of the very most critical aspects of a business. The business must procure the fund needed for the business especially in the initial stages. This fund can be made from variety of sources but organizations are at first financed by debt or equity. External funds are made available through capital markets to companies which require outside capital infusions. Selling shares involves important strategic and practical considerations as well as legal compliance concerns.

5. Literature

(i). Equity markets are the means where company can boost capital by selling portion of its ownership and control. Selling stock or shares is the most typical method to generate finance. Company has the advantage of getting a much larger investment market from which it can receive investors. Investors provide investment finance to the company in trade of part of rights of its ownership. Companies that are raising capital by creating and selling new shares, achieve this task to increase the financial health of the business enterprise. It is usual for the business to issue shares at some stage with their business. Shares are issued for variety of reasons aside from raising finance e. g. it can be issued within a director or employee bonus scheme or even to distribute equity to new investors in order to benefit in the organisation's future success. Although a company may also raise finance through other sources like borrowing, equity can be raised without much complication and procedures. Equity has few advantages over loans or any other form of debt as it does not have to be repaid nor are there regular payments to be made and dividends are paid at the choice of the directors. It really is much better to get finance for the organisation in comparison with borrowing from bank or any other lending source and much more amounts can be raised than borrowing. In general, capital is raised to be able to generate cash for business expansion of the business and/or to lessen your debt level (leverage or gearing) of the organisation. The administrative centre produced from selling shares may also be used for growth purposes as well as for future commercial ventures. It may be utilised to focus on a fresh market or even to market a fresh product or to acquire a new business. Other features of shares issue include: Company will keep funds indefinitely, there's no cost or payment on the funds as dividends are just on earnings no collateral is required for equity investment. Companies like Bowleven Plc can raise finance easily by issuing shares when their search for seeking partners bears no fruit and they are in desperate need of cash. Besides, the companies cannot borrow a large amount such as 71 million when their financial position is not good as large amount of cash is unavailable through some sources. They need to provide information regarding company's assets, gearing levels and cash flow (projected and current). Securities need to be provided as well as restrictions are applied on company's functions, decision making, policies and procedures. Shares issue on the stock market can resolve many of the problems companies face. The firms also need to take into account issues relating to shares issue like shared control of the organization, tax deductions, cost of equity, profit sharing and restrictions.

(ii). Most companies contact an agent when they want to make an investment decision especially when issuing shares in the currency markets. This is sometimes essential to do as it isn't possible to execute stock trades with no the membership of your stock market. However, there are a few instances Bowleven Plc can sell shares to investors without needing assistance from Royal Bank of Scotland and Merrill Lynch as their brokers. Although there a wide range of ways, each method requires some way of measuring work and minor expenses. Furthermore, the company will have to locate the customer itself. To market shares with out a stock broker, Bowleven Plc can open its brokerage account or get registered as a member of a stock exchange. In this manner the business can directly sell shares to the investors. This is the easiest way to sell stock on the market. Bowleven Plc can also introduce company's personal purchase plan for investors in which the investors can directly contact the business. Bowleven Plc may offer something called Dividend Reinvestment Plan (DRIP) as much large companies offer, in which all dividends are reinvested in additional shares rather than being deposited into current shareholder's account. The other option designed for Bowleven Plc without utilizing a broker is to appoint company's stock transfer agent who track and process the stock. It is cheaper than taking help from a broker. Equity finance can be made by sale of ordinary shares to new investors through the stock market or it can be a sale of shares to existing shareholders through a rights issue. The company can sell shares to existing shareholders to improve capital compared with their existing shareholdings at a specified price within a specified time. That is a great way of issuing shares to shareholders without engaging a broker and it can help protect the ownership of the business as it remains in the same hands. Another method accessible for Bowleven Plc is to issue preference shares. Preference shares have fixed dividend rate and is also paid to shareholders before any dividend is paid and it is only paid if sufficient profits are available. By issuing these shares, Bowleven Plc can retain control of the company as these haven't any voting rights. From the company's viewpoint, preference shares are beneficial as it generally does not restrict the company's borrowing power, at least in the sense that preference share capital is not secured against assets available and it generally does not lower the equity/debt balance. Other ways that Bowleven Plc can apply contains online shares trading which is cost effective and time efficient. While using access to internet, the company can create online brokerage account and sell stocks to investors without ever having any contact with a stock broker. The business can also sell stock via an in-the-money covered call. This implies writing a choice below the current share price. This is a favorite method used by large institutions to market large quantities of stock. The company can also use 'Trade points' that allows it to sell shares to bypass the usual system of going through the broker. Other techniques include selling rights and warrants that are securities that grant the right to buy shares at specified price for a specified time.

There have been many changes and innovations in the financial markets over the past few years regarding which shares to trade and the way to trade these. Whatever method Bowleven Plc adapts, it should consider the expense of capital (equity), issue costs, administrative, legal and everything the related fees.

(iii). Investment appraisal is a planning process used to ascertain a firm's long-term and short-term investments which will be the major issue for financial managers. This area is really important, because the decisions made involve the direction and opportunities for future years growth of the firm. Financial commitment making is of essential importance to a business and also to support this decision making process, effective appraisal techniques are most valuable tools. When a company like Bowleven Plc spend money on the development or expansion of business, there are quantity of stakeholders involved. Investors and partners need to find out how their money will be invested and exactly how much profits will they get in return or how much will they gain in long term. Investment appraisal may follow a varied measures and standards with regards to the decisions maker or stakeholder's priorities. These dissimilarities in priorities are usually represented by long-term growth versus short-term profits. Study strongly directs that the investment's feasibility research is mainly predicated on financial cost-benefit analysis, conducted using traditional capital investment-appraisal techniques. Most commonly used for appraisals are Payback Period, Discounted Cash Flow and Accounting Rate of Return/Return on Investment. Techniques such as Internal Rate of Return and Net Present Value are perceived as being more difficult and are used to a lesser extent. As traditional capital investment appraisal techniques are mostly used, one can assume that potential partners mentioned in the case study could use these to evaluate the viability of drilling wells from the Cameroon coast. These techniques are well known, well understood, easy to use and are focused on financial gains and are developed to increase investor's profits.

Discounted CASHFLOW (DCF) is a capital investment appraisal technique of valuing a project or company using the concepts of the time value of money. Only cash flows related to the near future profitability of the investing share are included in the decision analysis. Whether or not to get, this decision is situated on how the future discounted cashflow will impact the business's present value. Once the company determines the net cash flows and establish the discount rate, it can apply this discounted cashflow technique for analysis and ranking investment alternatives. Net Present Value (NPV) is the most economically-sound technique that involves discounting all future project cash flows into the present value using the business's discount rate, then deducting the web cost of the investment project. The NPV method is regular with the idea of company's objective of maximising today's value of that is shareholders' wealth. It takes into account of changing value of money as time passes and pays to for comparing similar projects. Drawback of NPV method is that it's difficult to look for the discount rate. Internal Rate of Return (IRR) method is another popular technique. It is a special case of the NPV method. The IRR is the distinctive discounted rate that associates the present value of the future cashflow stream to the project cost. IRR calculates an alternative cost of capital including an appropriate risk premium. It permits comparison to be made projects of different values. The project offers a chance to earn a profitable profits on return and really should be undertaken if IRR is higher than the firm's hurdle rate. The technique often employed by many organizations, is the payback method. The payback method attempts to regulate how long it will require for the project to retrieve the full total investment costs. The payback method is not really a measure of profitability, unlike the NPV and the IRR methods; instead, this can be a measure of time. It really is easy to use and is useful for short-term decision making. Disadvantages of like this range from an overly simplistic view of the situation, it doesn't take account of the fact that future returns may be less valuable, it often ignores qualitative aspects of the decision, it takes no account for inflation, taxation or interest levels.

Apart from the above mentioned capital appraisal methods; there are few other techniques available that the partners can adapt e. g. Average Rate of Return (ARR) where profit produced by the investment is weighed against the expense of the investment; Adjusted cost-benefit method in which cost and great things about the investments are analysed; strategic fit which proposes investments be evaluated mainly in function of their contribution to a firm's competitive advantage; option models and balance scorecard by firmly taking into account different views and perspectives. Regardless of the existence of an abundance of literature, capital investment appraisal for investments like Bowleven Plc's, it is hard to appraise. Since all techniques have their drawbacks, reliance on a sole technique can lead to sub-optimisation or even failure. So that it makes sense to use a combination of techniques, eliminating or diminishing the weaknesses of each of the techniques used. Multi-layer evaluation process is highly recommended. A multi-layer analysis process uses different evaluation techniques, which are pretty much ordered in a hierarchical manner. Other issues also needs to be considered when choosing an appropriate appraisal method: costs of investment, inflation, depreciation, opportunity cost, simplicity of method, amount of simplicity, adjustment of taxation, capital allowances and risks and assessing uncertainty

References:

Geddes, R. (2003), IPOs and the equity offerings, Butterworth-Heinemann

Grossman, T. and Livingstone, J. (2009), The Portable MBA in Finance and Accounting (4th edition), John Wiley and Sons

Correia, C; Flynn, D; Uliana, E. and Wormald, M. (2007), Financial Management (6th edition), Juta and Company Ltd

Pike, R. and Neale, B. (2008), Corporate finance and investment: decisions & strategies (6th edition) Trans-Atlantic Publications

GTG (2008), ACCA - P4 Advanced Financial Management (INT), Get Through Guides

BPP (2009), ACCA - P4 Advanced Financial Management: Study Text

Edition: 3, BPP Learning Media

IFP (2008), ACCA - P4 Advanced Financial Management, International Financial Publishing Limited

Agar, C. (2005), Capital investment & financing: a practical guide to financial evaluation, Butterworth-Heinemann

Ogilive, J. (2007), CIMA Official Learning System Management Accounting Financial Strategy (4th edition), Elsevier

Artill, P. and Mcaney, E. (2009), Management Accounting for Decision Makers (6th edition), Financial Times/Prentice Hall Schuster, P. (2007), Investment Appraisal: Methods and Models, Springer

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