Money Management: Finance and Accounting - Assignment Example

? Money Management Money may not be able to buy any mental happiness, yet it is a necessary instrument for everyone since it allows the exchange of material required for one’s everyday life. Hence, the management of money is also necessary such that the available funds may be optimally utilized or give sufficient outcomes as savings for the individual who might have invested the amount (Aldrow, vi). This report would discuss on a particular case as to how an individual may be able to utilize a saved amount of funds after he has reached his retirement, which approach may prove to be a better approach for the individual and which stock should he select to invest depending on different factors that need to be taken into consideration. Management of Money: Discussion on the Case: As the case represents, the individual concerned has retired and he has $500,000 saved with him that he can use either for investment or for any other purpose. Either a yearly pension from a life insurance company may prove to be beneficial for him or the individual may manage the wealth himself by investing in a bank. The purpose here is to determine which approach would be more beneficial for the individual after his retirement. Case 1: Yearly Pension from Life Insurance Company: In case of life insurance companies, depending on the age and life expectancy of the individual the insurance company may decide on the pension amount that can be paid to the individual (A Basic Lesson in Immediate Annuities). It is assumed that the individual is a male and his age is 60 years. He has an amount of $50,000 to invest. If he invests the money in a life insurance company, several options of income payment may be available to him. The highest amount that he may receive is $8,455 on a monthly basis on the plan of “Guarantee Income for a 5-Year Period Certain Only” (Estimated Quotes for a Single Life Annuity). The lowest amount would be received on the plan would be on the plan of “Guaranteed Income for a 25-year Period Certain Only” and the amount is $2,520 per month (Estimated Quotes for a Single Life Annuity). Thus the individual would be capable of receiving an amount in between this range if he invests the money in a life insurance company. At the same time, the individual is capable of choosing any one of the options available to him, depending on the needs and planning of the individual. Case 2: Managing Own’s Wealth: The individual might even decide to plan and manage his own wealth. If he wants to deposit the amount in a bank and withdraw a certain amount every year, he would have an interest payment for himself that he will receive on the amount he has deposited. A total savings of $500,000 might expect to receive an amount of $25,000 in a year from the portfolio of income. This amount may be received if the annual rates of returns are 7 percent or 8 percent and the individual withdraws, say 5 percent on the amount. Withdrawing an amount of more than 5 percent may create troubles for the principal amount and increase risk for the individual (Generating Income from a $500,000 Portfolio). Thus if an amount of $25,000 can be received through bank investment, then monthly returns are expected to be $2083. Comparison: If the two cases are compared it can be realized that the amount that the individual may receive from a life insurance company is much higher than the amount received from a bank investment. Even the minimum amount that a life insurance company can provide the individual with is $2520 which is more than the amount of $2083 that can be expected from a bank investment on a monthly basis. In addition to the higher amounts that a life insurance company may pay off to its customer, it also provides facilities for the family members of the individual depending on the plan that the individual selects for his investment. Thus, even after his death, his family members may receive the deserved amounts that might prove to be beneficial for their wellbeing. Thus comparing both the investment options available to the individual it would be advised to go for insurance facilities if he requires higher returns at the same time accompanied with certain facilities for his family members. Share Analysis: An individual may invest his funds in shares of companies as well. For the purpose of discussion two companies have been selected. The company the individual would like to invest in is the Becton Dickinson & Company and a company that investors might try to avoid is Cash America International Inc. A study on these two companies would make it clear as to why an investor would choose BD over Cash America. Becton Dickinson & Company: BD which is a medical company advanced in the use of technology and serves different healthcare facilities, researchers who conduct studies on life sciences, clinical laboratories, industry as well as the public in general. The company provides its customers with wide variety of medical supplies, laboratory devices and apparatus and necessary products for diagnosis. The headquarters of the company are in the United States and it is spread across the globe in around 50 countries (About BD). The company is focused to serve all people and provide them with healthy lives. Tremendous efforts are applied by the members of the company towards using their expertise in the service of human health and facilities (Social Responsibility). The company intends to become a leading company in relieving people from all sufferings through their services that include modernized healthcare facilities and technologies (Sustainability at BD). The financial ratios of the company would give further understanding of the company’s performance over a period of one year. The financial information for the company as obtained in the last twelve months is as represented in the following table: Ratio Value Price/Earning 5.59 Price/Book Value 1.46 Price/Cash flow 0.03 Dividend Yield (in %) 2.2 Market Capitalization (in $ m) 16,558.6 Net Profit Margin (in %) 17.83 Return on Equity (in %) 25.98 Debt/Equity 0.49 Table 1: Financial Information for Becton Dickinson & Co. (Becton Dickinson & Co.). These financials clearly indicate that the company is in a good financial state where the financial earnings ratios of the company reflect highly satisfactory results. This implies that the company has been performing efficiently over the last twelve years and before and hence the profit gains of the company have also been sufficiently high. The price earnings ratio being 5.59 indicate that the investors of the company are ready to pay $5.59 for $1 of current earnings. The price to book value also reflects sufficiently good result signifying that the company is highly valued among its investors. The company has been found to provide its shareholders with dividends of 2.2 percent which seems to be quite satisfactory for its shareholders. The profit margins and returns of the company are also high presenting a sound financial state of the company that investors may rely upon. The debt to equity being low indicates that the company has borrowed lesser amounts of debt in comparison to the total equity if the firm. These results highlight the efficient management of the company in regard to its assets and other available resources towards effective performances thus leading to successful financial outcomes. Moreover the company was found to be given five stars by the Morning Star stock reader. Cash America International Inc.: Cash America International Inc. is a financial services company in the United States spreading across 1000 different locations. The products of the company include loans that are both long-term and short-term in nature. The company has several online subsidiaries that perform in association with the company’s goals and objectives (About Us). Along with the providences of loans, the company also serves its customers with other products like prepaid visa, wireless, check cashing, gold buying and other similar instruments (Financial Services). However the performances of the company have not been successful quite unlike the BD Company. Morning Star had rated this company with no stars. The financial results of the company would give an idea about the current financial status of the company and whether the company can be recommended to the investors for their investment purposes. The financial ratios for Cash America International Inc. are presented in the following table: Ratio Value Price/Earning 10.79 Price/Book Value 1.59 Price/Cash flow 0.13 Dividend Yield (in %) 0.26 Market Capitalization (in $ b) 1.58 Net Profit Margin (in %) 9.14 Return on Equity (in %) 15.96 Debt/Equity 0.51 Table 2: Financial Information for Cash America International Inc. (Cash America International Inc.). The results of Cash America indicate that the performance of the company has not been satisfactory over the period of last twelve months particularly in comparison to Becton Dickinson Company. The market capitalization of the company can be found to be quite low. Also, the dividend yield of the firm has been much lower that does not seem to satisfy the demands of the shareholders. The ratios of the price to either book value or sales reflect much l ratios indicating poor performances of the firm with respect to its achieving sales or comparing with the book value of its shares. The overall profit margin of the company is also low and this might negatively impact the investors to make investments in this company. The debt equity ratio being satisfactory indicates that the company is efficient in optimally utilizing its available resources in the achievement of its financial results. However, the overall business outcome of this company would indicate that the company has not been able to efficiently manage its operations and functions. The returns of the company have thus been very low. Moreover the high debt equity ratio also indicates that the company has borrowed large amounts of capital from outside the company which is again a factor of risk for the investors. Thus a comparison between these two companies would clearly reflect the reasons why the individual would select Becton Dickinson & Company for investing his money whereas avoid the Cash America International Inc. The financial performances of companies are greatly responsible for influencing investors either to invest or not to invest in a company along with other factors relevant in the decision making. In the concerned case of study, the individual would be investing his money after he is retired. Hence he would prefer to choose a share or a company that would provide him with better results with fewer risks. Becton Dickinson, presenting a sound performance and financial results would be preferred by the individual as his company for investment. Cash America on the other hand having records of higher debts and lower profits would be ignored by the investor since investing in such companies would mean greater risks for the investor and even if the company may provide with better results, which might require large amounts of time. Thus in this case, the individual may choose to invest in Becton Dickinson if he wants to invest his funds in a company share. Conclusion: After over viewing the different options available to the individual to invest his money after his retirement, which is an amount of $500,000, it can be understood that the individual may either invest the money in a company share or he may choose to invest the money in either a secured bank or in a suitable scheme provided by life insurance companies. The life insurance companies have been found to give more returns along with added facilities to the customer, which is in comparison to the bank investment, much higher. Hence the individual may choose to apply for a life insurance scheme. On the other hand, if he wants to invest in a company share, he may choose to invest in Becton Dickinson that has records of sound financial performances with higher profit margin and lower debts and the ratios between price of the company’s share and book value or sales or cash of the firm reflect highly satisfactory results. Thus the individual may even choose to invest in this company which I expected to give higher returns than several other companies. References 1) “A Basic Lesson in Immediate Annuities”, Total Return Annuities, 2011, September 27, 2011 from: http://www.totalreturnannuities.com/annuities-immediate/ 2) “About BD”, BD, 2011, September 28, 2011 from: http://www.bd.com/aboutbd/ 3) “About Us”, Cash America, 2011, September 28, 2011 from: http://www.cashamerica.com/AboutUs.aspx 4) Aldrow, B S Janice. The Art of Money Management: For a Simple Life, Indiana: iUniverse, 2005 5) “Becton Dickinson & Co.”, Morning Star, 2011, September 28, 2011 from: http://financials.morningstar.com/ratios/r.html?t=BDX®ion=USA&culture=en-us 6) “Cash America International Inc” , Morning Star, 2011, September 28, 2011 from: http://financials.morningstar.com/ratios/r.html?t=CSH®ion=USA&culture=en-US 7) “Estimated Quotes for a Single Life Annuity”, Immediate Annuities, n.d., September 27, 2011 from: http://www.immediateannuities.com/information/rates.html 8) “Financial Services”, Cash America, 2011, September 28, 2011 from: http://www.cashamerica.com/FinancialServices.aspx 9) “Generating Income from a $500,000 Portfolio”, Our Business News, 2011, September 28, 2011 from: http://www.ourbusinessnews.com/generating-income-from-a-500000-portfolio 10) “Social Responsibility”, BD, 2011, September 28, 2011 from: http://www.bd.com/responsibility/ 11) “Sustainability at BD”, BD, 2011, September 28, 2011 from: http://www.bd.com/sustainability/ Read More