Overview of Strategic Issues - Example

Name: Lecturer: Course name: Course code: Date Question one Overview of strategic issues 1. Joint venture proposal The company is contemplating making an investment decision to a partner with ELF on a 50-50 joint agreement. the company is faced with strategic issue on whether to enter into a joint agreement or not and factors to consider in concluding on the viability of the company and also whether the company and can restructure and transfer back the parent company from France to Monaco. These two issues are critical to su8cces of the company as they both determine whether the company will continue into existence or not. shifting the [parent head office to Monaco is unknown factor and the management or not certain on successful performance of the company after the relocation, joint venture investment is a concern that need to be considered before concluding on the project investment. the following are some of the issues that need to be ascertained in concluding on a joint venture investment. the financial analysis and non financial analysis on the company performance Assessment of the proposed joint venture Introduction Financial analysis and non-financial analysis Financial analysis entails appraising a project on the basis of qualitative techniques and making a conclusion on the project viability. in appraising a project using the net present value, factors such as discounting factor, time value for money must be considered and the project with positive net present value should be considered for investment since there will be a return from investment (R. Charles Moyer, 2011). Negative net present value implies that the project will not be able to meet its initial outlay and thus will create extra cost to the company in which case, such project should be rejected. on- financial analysis on the other hand implies that a project manager will use other non financial factors such as the systematic and unsystematic risks affect the company in assessing the performance of the company and concluding on whether to invest on the project or not. 1. 1financial analysis on investment proposal In ascertaining the viability of the investment, the relevant financial investment tool employed is the use of net present value (Ogier, 2013). This is an approach that discounts the future cash flow into the present value and to make an assessment on the project viability. Where a project has a positive net present value, the project should be accepted since investment in this project will yield a return. From the above case study analysis, investment in the project will yield a positive net present value hence the company should consider the joint venture proposals. The relevance of the appraisal tools is that it considers the time value of money in discounting future cash flow into present years hence the decision on the project to invest is reliable. Assumption In computing the net present value of the project, we used the home currency instead of the foreign currency in which the company operates. The basis of our preparation is to ascertain how well the company in terms of home currency is and therefore the result concluded is based on the local currency depicting a positive trend in terms of Net present value. It is as well assumed that the net present value of the company will be even and continue to depicts the same trend for unforeseeable future, economic performance, inflation rate as well as the competitors effect on the company performance is held constant in concluding on the Cash flow trend analysis as well as the net present value of the company to invest in. 1.2 non-financial analyses we considered the advantage and threat of the joint venture in evaluate the investment and concluding on whether the company is reliable and trustworthy, form the examination, it was concluded that the company is genuine with no incidence of legal suits currently facing the company and therefore, it was apparent that the company is a trustworthy invest free of scandals and legal proceeding against them (Mick Broadbent, 2012)These are some of the sensitive factors that had to be ascertained before concluding on the general performance of the company. this factors are always considered as contingent liability and are included in the income statement of the company, contingent liability are situation may that may or may not turn out to be an asset or a liability to the company and thus poses a risk to the proposal and thus it was evident that the company do not have any contingent liability that will affect the general performance of the company 2. Re-domiciling to France Key operational aspects that they need to consider when re-domiciling the France parent company to Monaco Tax haven Relocating to France would help the company in terms of tax haven since Monaco is having a low corporation tax rate unlike France. This will therefore boost the operation of the company in terms of the profitability and the operating cost. the advantage of tax haven is that, the company is reduced from huge tax burden and hence encourages business because, small taxation on the company’s reported net profit would lead to retention of high profit and thus the funds will be used or further investment, in this Monaco is a good investment hub to the company. Political risk in Monaco Political unrest in a country discourages investment and therefore a potential investment appraisal should incorporate the political situation of a country to make an investment in. This is due to the fact political unrest will destabilize the investment by creating inflationary situation or taxation policy. This factors both affect the general performance of the company and hence ought to be ascertain in relation with the financial analysis of an investment. The current state of Monaco is encouraging since the state of security is well secured interim of politic risk. Monaco is country with reserved politics which is a conducive environment for investment. Is a factor that encourages the company to shift to Monaco other than tax havens and available investment opportunities Repatriation of profit This is a situation whereby a foreign company is bale to move the profit generate form the local country to a foreign country. In other countries this type of investment is taxable and for a foreign company taxing an offshore investement would amount to double taxation which many foreign company finds it add to cop up with double taxation rule. Monaco do not have limits on moving the profit generated in the country to a foreign land hence there will be no further taxation of offshore investment (Lucey, 2003). this is a good news to the company since the company is having a registered head office in France implying that profit generate in Monaco will be transferred to France without being taxed further other than the corporation tax that every company is entitled to remit to the revenue authority. In this case, incidence of double taxation will not be eminent implying that the company reported profit in Monaco will be high. Availability of funding In making an investment decision, availability of capital to fiancé the project is eminent. A company cannot make an investment decision if it does consider the source of capital to the project since, Interfering with existing capital structure to fiancé a new venture would make a business to be insolvent or run bankrupt. Therefore clear method of raising the capital should be considered. Relocating to Monaco would require a total of $ 5million and the funds will be available. The company is not facing capital rationing in its investment project hence the project of relocating to Monaco will be relevant in order to explore the market globally and to earn more revenue to the company Workforce There is plenty of available workface with favorable salaries to be paid in Monaco. This will lead to reduction in total operating cost and increases the net profit (Lucey, 2003). Workface determines the level of [production that a company will be able to achieve within a given set time other than salary reduction and for this reason, the company will be advantage from cheap labor force in Monaco. 3. Source of finance The source of finance to the company should be optimal and well manage=able in order to ensure that the normal operation of the business is not affected by the capital requirement of the new project (Lucey, 2003). Therefore the company intends to generate fiancé both internally and externally as follows, 3.1 internal sources This involves the process raising capital for investment from internal available source; The Company intends to raise the new source capital on an existing unissued share capital. Financing an investment using equity is an expensive method levered firm would command high cost of capital with low value of equity which will be costly to the company (Eugene F. Brigham, 2009). The optimal capital structure therefore is a mix of debt and equity which comprise a levered firm. In this case, levered firm would command low cost of capital with high value of loan which implies therefore that the company will b e having huge amount of capital with low cost on the debt. 3.2 external sources External source of capital are the capital need that comes from third parties other than the existing financiers of the company. The external source of capital for financing an investment entails the debt capital such as the bank loans, debentures as well as the Preference share capital. The source of capital is considered optimal since it has low component cost with high value implying that the company will not be over burden in repaying the debt capital unlike equity financed capital 4. Conclusion In making a decision on the source of capital, the company should use the perking order model in ascertain the component cost of capital of each source as well as the internal rate of return of the project,. An optimal capital structure therefore is a mix of debt and equity that gives the lowest component cost and a high return on investment (Dayananda, 2002). In this case a levered firm will be able to fiancé its project without capital constraints or rationing since the company is able to repay its debt with ease while at the same time enjoying the return on investment. Net present value is strong investment appraisal tool since it consider the time value of money by discounting the future cash flow into year one and making an assessment on the project viability, A viable project is one that has a positive net present value on investment since, Positive net present values implies that a return will be realized from investment when money is expended on the project. From the above case analysis, A joint venture will yield a return since, an assessment on the company depicts a positive net present value hence the company i9s a going concern and a viable investment as well. Placing reliance on the financial analysis in making a decision as to whether invest in a project or not is not sufficient enough since the company might be having other non financial constraints that the majorly affect the general performance of the company. In this case it is deem relevant to consider other non financial factors affecting the performance of the company. Some of the non financial factors that will affect the performance of the company as: the legal proceeding against the company provision for bad and doubtful debt (Colin H. Kirkpatrick, 2006). This are contingent liability that may turn out to be an asset or a liability to the company and will as well affect the general performance of the company other than the net present value results,. In this case, financial and non financial analysis should be ascertained in concluding the general performance of the company and making a decision to invest or not in the company. 5. Recommendation The general performance of elf [plc company is good and thus investment deal of 50-50 joint venture would yield a return since, the existing cash flow of the company depicts positive net present value which is a string indicator that the business will yield a return inform of profit from investment. The company should therefore consider raising the capital to fiancé the project from a mix a debt and equity that is optimal. Optimal in this case implies that the source of capital should a high value with low component cost of capital (Chandra, 2008). This will therefore make the company comfortable in relaying the debt and equity as well as realizing profit from investment devoid of interfering the normal operation of the business or having a capital rationing on other project on order to fiancé a ne w project. Capital rationing is not ideal since it will lead to stunted growth of the project or even a complete abandonment of other project due to capital inadequacy. Planning for capital requirement therefore is relevant in so far as the company is to achieve its desired end results as far as capital investment ad project appraisal is concerned. Reference list Chandra, P. (2008). Financial Management. Colin H. Kirkpatrick, ‎. W. (2006). Cost-benefit Analysis and Project Appraisal in Developing. Dayananda, D. (2002). Capital Budgeting: Financial Appraisal of Investment Project. Eugene F. Brigham, ‎. F. (2009). Fundamentals of Financial Management. Geddes, R. (2002). Valuation and Investment Appraisal . Jain, K. &. (2007). Financial Management - Page 19-19. Lucey, T. (2003). Management Accounting. Mick Broadbent, ‎. C. (2012). Managing Financial Resources. Ogier, T. (2013). The Real Cost of Capital ePub. R. Charles Moyer, ‎. M. (2011). Contemporary Financial Management . Röhrich, M. (2007). Fundamentals of Investment Appraisal:. Ryan, B. (2007). Corporate Finance and Valuation. Siddaiah, T. (2010). International Financial Management. Terence Lucey, ‎. L. (2002). Quantitative Techniques. Uwe Götze, ‎. N. (2007). Investment Appraisal: Methods and Models. Zane Swanson, ‎. N. (2003). The Capital Structure Paradigm: Evolution of Debt/equity. Appendix Net Present Value Years   0 1 2 3 4 5 Gross Cash flows €' 000   1,430 1,638 1,877 2,151   Operating costs €'000   -209 -214 -220 -225   Taxable Profits €'000   1,221 1,424 1,657 1,926   Tax @ 29%     -354 -413 -481 -558 After Tax Profits €'000   1,221 1,070 1,245 1,445 -558 Initial Investment €'000 -1,200 -800 - - - - Net Cash flows €'000 -1,200 421 1,070 1,245 1,445 -558 Discount factor @ 10% 1.0000 0.9090 0.8260 0.7510 0.6830 0.6210 Present Values €'000 -1,200 382 884 935 987 -347               Net Present Value €'000 1,641 Decision The NPV is positive and therefore from a financial point of view the project is viable. The joint venture should proceed Data Cost of equity 12% Cost of debt 7% Tax rate (Germany) 29% Spot rate(£/€) 0.841 Duration (years) 4 Interest rate(Uk) 2% Interest rate (euro zone) 1% Optimal capital structure €' 000 Weight Equity 13,000 65% Debt 7,000 35% Total 20,000 100% Expected Exchange Rate = Spot Rate x ((1+interest Uk)/(1+interest rate in Euro zone))^time Year     Expected Exchange Rate 0 0.841 0.841 1 0841*[(1+2%)/(1+1%)]^1 0.849 2 0841*[(1+2%)/(1+1%)]^2 0.858 3 0841*[(1+2%)/(1+1%)]^3 0.866 4 0841*[(1+2%)/(1+1%)]^4 0.875 Years   1 2 3 4 Uk Cash flows £'000 450 518 595 684 Exchange Rate 0.849 0.858 0.866 0.875 Converted Cash flows €'000 530 603 687 782 Euro Cash flows €'000 900 1035 1190.25 1368.7875 Total Cash flows €'000 1,430 1,638 1,877 2,151 Cost of capital = We x Ke + Wd x Kd = 65%*12%+35%*7 %( 1-29%) = 9.54% = 10% \       Year     1 2 3 4 Operating costs €'000 235 235 235 235 Depreciation €'000 26 26 26 26 Cash Operating costs €'000 209 209 209 209 Inflation €'000 0 5.23 10.59 16.09 Inflated Figure's €'000 209 214 220 225 Read More