Financial and Non-Financial Analysis, and Capital Investment - Case Study Example

INTERNATIONAL BUSINESS al Affiliation) (3038 words) Key words: Financial and non-financial analysis, Capital investment. 1. IFM Plc. has been approached by EMF Plc. for a joint venture. EMF Plc. is a new entrant in the industry and have offered two million Euros in equal sharing joint venture deal for over four years. The cumulative cost of the joint venture is anticipated to be 4 million Euros. EMF Plc. as a company is based in Germany specializing in investment fund management. The Finance Directors for both IFM Plc. and EMF Plc. came together and came up with assumptions that will accompany the agreement. The paper evaluates the proposed joint venture with the help of non-financial and financial analysis. The paper has also stated the capital investment techniques used and its appropriateness. The paper has further stated assumptions that the finance directors created during the agreement. The agreement will initially assume the joint venture to be for four years. Upon the collapse of the contract, the company has an option of continuing with the venture beyond a four year period. Additionally, the company will pay 60 percent of the investment before the agreement and the remaining forty per cent of investment will be paid during the first year of operation. The payment will relate to the investment shares. The companies are anticipating to record an annual cash flow of 0.900 Million Euros and 0.450 Million Euros in the first year and is expected to rise by15 per cent per year. Additionally, each and every revenue will be generated from United Kingdom market industry with a spot rate of 0.8410 pounds per Euro. The operational cost of the subsidiary activities are anticipated to 0.235 Million Euros annually which entails 0.0258 Million Euros as depreciation. The annual inflation rate is taken to be 2.5 per cent and this exclusively applicable to operational cost. The United Kingdom interest is anticipated to two per cent and the remaining Eurozone is taken to be one per cent. Consequently, the Germany’s tax rate is presently at two per cent. The taxes are meant to pay on the surplus revenue generated in the country by the subsidiary company. Finally, the two directors assumed that the taxation treaty existed between Germany and United Kingdom. The capital investment appraisal method used in the analysis is Return on Capital Employed. The calculation is based on the ratio of the company’s net profit to its employed capital. The method will measure the profitability of the strategy that the company will use through expressing the profit as a %age of the employed capital. The company will invest a total amount of 4 million as the capital employed. Therefore, company will calculate the Return on Capital employed as ROCE = Net Operating Profit / Capital Employed. The more accurate value will be calculated using the mean capital employed, which is the summation of the long-term investment. From the theoretical framework, the higher return on capital on the employed capital will be favorable showing that the firm will generate a lot of income. When the company has a lower Return on Capital Employed this will indicate that the company has a lower profitability. Based on the assumption, the company will pay 60 / 100 * 2M = 1.2 M during year 0, while the remaining 40 / 100 * 2M = 0.8 M during the first year. During the first year, the gross cash flow will be 0.900 M + ( 0.45 / 0.83 ) = 1.435077 M. During the second year, the gross cash flow will be 1.435077 * 1.15 = 1.650339 M. On the third year, the gross cash flow will 1.650339 * 1.15 = 1.89789, during the fourth year, the company will record a gross cash flow of 1.89789 * 1.15 =2.182573. The operational cost for the company annually will be 0.235 M – 0.0258 M = 0.2092 M. Due to inflation, the operational cost during the second year will be 0.2092 M * 1.02 = 0.2134 M. During the third year the operational cost will be 0.2134 M * 1.02 = 0.2177 M. On the fourth year, the operational cost will be 0.2177 M * 1.02 = 0.2220 M. Consequently, the tax rate of 29 per cent will be applied on the gross profit as shown in the table below. Year 1st 2nd 3rd 4th Capital 1.2 2 2 2 Cash Flow 1.435077 1.650339 1.89789 2.182573 Operational Cost 0.2092 0.2092 0.2092 0.2092 Cost after inflation 0.2092 0.213384 0.217652 0.222005 EBIT 1.225877 1.436955 1.680238 1.960568 After Tax 0.870373 1.020238 1.192969 1.392004 ROCE 102.1564 71.84774 84.0119 98.02842 From the above ratio it is evident that the measured efficiency favors the decision of forming a joint venture with EMF Plc. The company will use the ratio in favor of the joint venture because the higher ratio shows a higher profitability after the agreement. Therefore, when IFM Plc. forms a strategic alliance with the EMF Plc., a positive outcome will come out of the agreement. The joint venture will be the same but will have significantly various positive implications for the two companies. The partnership should involve a continuous relationship even after a four year period. The partnership will result to the company’s benefits especially on the project objective. When IFM Plc. forms partnership with EMF Plc., the companies will get the chance and opportunity to gain new expertise and capacity. Additionally, the joint venture will enable IFM Plc. to enter new geographical market, new related business, and gain new knowledge in terms of technology. The company will also be able access greater resources which includes the technology and specialized staff. Additionally, IFM Plc. and EMF Plc. will be sharing risk between them. Consequently, the agreement will encourage flexibility in the operation of the company. For instance, the limited span of four years the companies created will limit the business exposure and commitment, then is it imperative that the two company’s extend the agreement even after the four year period. Due to the era of consolidation and divestiture, the joint venture will offer very creative ways for the firms to exit non-core business. Additionally, the firms can slowly separate their business from the operation of the business after the agreed period expires. When the business embarks on the joint venture, the firm will be forced to reconstruct its business. This will be favorable since it will act as a company’s potential for growth, the company will need to fit into the overall business strategy. The company will be required to view its business strategy before committing itself to the partnering company. This will help the company define what they sensibly expect. In fact the company will decide on the better ways in achieving the aim of the business. From the paper, the capital investment appraisal method that was used in the analysis is Return on Capital Employed. The calculation is based on the ratio of the company’s net profit to its employed capital. The method measured the profitability of the strategy that the company will use through expressing the profit as a %age of the employed capital. The company will invest a total amount of 4 million as the capital employed. Therefore, company calculated the Return on Capital employed as ROCE = Net Operating Profit / Capital Employed. The more accurate value was calculated using the mean capital employed, which is the summation of the long-term investment. From the theoretical framework, the higher return on capital on the employed capital was favorable showing that the firm will generate a lot of income. Assuming the company recorded a lower Return on Capital Employed this will indicate that the company has a lower profitability. 2. When IFM Plc. considers domiciling the parent company from France to Monaco, it is likely to face strategic and operational challenges. The company will be likely to expose themselves in a risk of losing its labour. The company might gain new employees, but will risk losing some of the skilled, cherished, and long standing employees who understand their business, the company’s culture, and how they like to the operation of the business to run. Therefore, when the company decides to domicile to Monaco, it will experience the challenge of losing labour. Additionally, when the company decides to relocate its parent company to Monaco from France, the company will lower its customer base in France. The company will be on a higher risk of losing long standing clients that will be lost when the company relocates, this could damage the customer satisfaction and loyalty to the company. The company will also incur some extra cost during relocation. The costs will be based and related to relocating which will be higher than expected. Higher costs affect the operation profit of the company. The company will also face the challenge of balancing costs with target market proximity. When the company is much closer to the clients, the more expensive the property will be. Another challenge that might arise from relocating is risk. If the company fails to conduct effective research of the market, then the new location will have downfalls and perks. The company is not always guaranteed that the welcome to the new market will be warm. The challenge of time and effort are more likely to face the company. Relocating a company to another country is not something that needs to be in a hurry. It can cause high stress level to the administration. Assuming the business is not stable, then there is high possibility that it will break. The company is likely to face the operation and strategic problem of regulation and new environment. The new location might easily present itself with new regulations in terms of taxes that might easily affect the operation of the business. Such challenges need to factor in planning and operation. Consequently, the challenge of disruption is prone to happen. Considering the process of transition, the company needs to know what will occur in the meantime when the operation of the company is still underway. There are various companies who specialize in relocating business from one country to the other. This company needs to be consulted for relocation management plan that suit the business needs. The company needs to be realistic, and keep costs in their mind and do their research. When relocation is well planned and executed with a lot of professionalism then moving the parent company will be the best answer for the company to achieve its dream and offer the business a new life. When IFM Plc. considers domiciling the parent company from France to Monaco, it is likely to face strategic and operational challenges. The company will be likely to expose themselves in a risk of losing its labour. The company might gain new employees, but will risk losing some of the skilled, cherished, and long standing employees who understand their business, the company’s culture, and how they like to the operation of the business to run. 3. There are various sources of finance that the multinational corporation has to fund the proposed expansion cross Asia. Funds for the multinational corporation can either be raised through external or internal sources. The internal sources can be through share capital, borrowing from patent companies and also retained earnings. Finance from the external sources can be raised through; commercial banks. Commercial banks in the entire world offer loans for the multinational corporations as they do for local operations. The banks also offer overdraws, above, over the loan amount. Additionally, the corporation can source its funds from trade bills discounting. The method will use as short-term financing technique. The method is widely used both locally and internationally. Assuming the corporation holds the bill exchange, the company will get the funds encased prior to the schedule maturity via the bank. The bills are not encashed at a discount. The multinational corporation can also source for its finances form the Euro-currency market. When the cash is deposited outside UK.. The currency is termed as the Euro currency (Rugman & Hodgetts, 2003). The deposits are beyond the national banking activity control. Therefore, the Eurocurrency market is another source that the multinational corporation will source cash. Another source for the company is through the Euro-bond markets. Just like the euro-currency market, the market can be a perfect source of income for the company. Additionally, the multinational corporation can source funds from the development bank. Various countries have got the development bank, which provides medium and long term loans. Various agencies at the national level provide incentives for the companies to invest within their nations or financing export. Consequently, the company can source finance from international agencies. Various international agencies finances specific project categories. The corporation can therefore, liaise with the World Bank and international finance corporation to finance its projects. Also the company can source finances from Regional Development Banks, who offer finance to certain projects. The multinational corporation can source for finances from equity insurance. In equity insurance a global organization that is cash strapped works in hand with the investment to evaluate the situation on equity markets, find out the stock insurance and determine the best ways of preventing financial problems in future (Hill, 2003). Given the presence globally, the business can cope with affordable financing dearth on the domestic front. The main equity market which the multinational corporation can raise money is through equity insurance. The company can also source finances through the selling the debt products. The bond issuance can frighten the company since the practice entails thorough comprehension of investor risk appetite and international credit market, together with keen regulatory procedures that the company needs to follow when registering the bonds before issuing them out. The debentures can serve as the stock issuance for the company to get more money. The organization can sell stocks and bonds on similar exchange. Besides the bond, the company can finance its operation through selling of commercial paper (Jones, & Jones, 1996). A multinational corporation can also rely on the private sources for finances. The business can contact private lenders such as the insurance companies and banks. Due to the international footprint, the multinational corporation can negotiate for a line of credit or loan arrangement with the management of the home country’s bank and direct the chief of the segment to follow up the bank. Additionally, the global company can finance its operation through private equity funds, hedge funds, and asset management companies (Daniels & Radebaugh, 1998). The company needs to consider various factors when accessing funds. The firm needs to consider the repayment terms in terms of how long the arrangement will last. Loans that are longer build up a huge interest over time. A company needs to look at the fee and interest structure. The cost involving the financing method needs to be accumulated before a decision is made. Some of the conventional costs for the loans include the broker’s fee, interest rate and the origination fee. Another consideration is the financing requirement. The personal requirement that the investor and lender write to the applicants need to be considered finances need to be pursued from sources that meet the requirement in full. Some of the conventional financing requirements include the financial ratio test and the credit score requirement like the interest coverage ratio and debt to equity. In conclusion, when IFM Plc. forms a strategic alliance with the EMF Plc., a positive outcome will come out of the agreement (Folsom, Gordon & Spanogle, 2001). The joint venture will be the same but will have significantly various positive implications for the two companies. The partnership should involve a continuous relationship even after a four year period. The partnership will result to the company’s benefits especially on the project objective. When IFM Plc. forms partnership with EMF Plc., the companies will get the chance and opportunity to gain new expertise and capacity. Additionally, the joint venture will enable IFM Plc. to enter new geographical market, new related business, and gain new knowledge in terms of technology. The Finance Directors for both IFM Plc. and EMF Plc. came together and came up with assumptions that will accompany the agreement. The paper evaluates the proposed joint venture with the help of non-financial and financial analysis. The paper has also stated the capital investment techniques used and its appropriateness. The paper has further stated assumptions that the finance directors created during the agreement. The agreement will initially assume the joint venture to be for four years. Upon the collapse of the contract, the company has an option of continuing with the venture beyond a four year period. Additionally, the company will pay 60 percent of the investment before the agreement and the remaining forty per cent of investment will be paid during the first year of operation. The company will also incur some extra cost during relocation. The costs will be based and related to relocating which will be higher than expected. Higher costs affect the operation profit of the company. The company will also face the challenge of balancing costs with target market proximity (Czinkota, Rivoli, & Ronkainen, 1989). When the company is much closer to the clients, the more expensive the property will be. Another challenge that might arise from relocating is risk. If the company fails to conduct effective research of the market, then the new location will have downfalls and perks. The company is not always guaranteed that the welcome to the new market will be warm. The challenge of time and effort are more likely to face the company. Upon the collapse of the contract, the company has an option of continuing with the venture beyond a four year period. Additionally, the company will pay 60 percent of the investment before the agreement and the remaining forty per cent of investment will be paid during the first year of operation. The payment will relate to the investment shares. The companies are anticipating to record an annual cash flow of 0.900 Million Euros and 0.450 Million Euros in the first year and is expected to rise by15 per cent per year. Additionally, each and every revenue will be generated from United Kingdom market industry with a spot rate of 0.8410 pounds per Euro. The operational cost of the subsidiary activities are anticipated to 0.235 Million Euros annually, which entails 0.0258 Million Euros as depreciation. Reference Czinkota, M. R., Rivoli, P., & Ronkainen, I. A. 1989. International business. Chicago: Dryden Press. Daniels, J. D., & Radebaugh, L. H. 1998. International business: environments and operations 8th ed.. Reading, Mass.: Addison-Wesley. Folsom, R. H., Gordon, M. W., & Spanogle, J. A. 2001. International business transactions 2nd ed.. St. Paul, Minn.: West Group. Hill, C. W. 2003. International business: competing in the global marketplace 4th ed.. Boston, Mass.: McGraw-Hill/Irwin. Jones, L., & Jones, L. 1996. New international business English: communication skills in English for business purposes New ed.. Cambridge: Cambridge University Press. Rugman, A. M., & Hodgetts, R. M. 2003. International business 3rd ed.. Harlow, England: Prentice Hall/Financial Times. Appendix: Tabulated Calculation for ROCE. Year 1st 2nd 3rd 4th Capital 1.2 2 2 2 Cash Flow 1.435077 1.650339 1.89789 2.182573 Operational Cost 0.2092 0.2092 0.2092 0.2092 Cost after inflation 0.2092 0.213384 0.217652 0.222005 EBIT 1.225877 1.436955 1.680238 1.960568 After Tax 0.870373 1.020238 1.192969 1.392004 ROCE 102.1564 71.84774 84.0119 98.02842 Read More