The Revolution in Corporate Finance - Assignment Example

Managerial Finance Name: Institution: Date: Managerial Finance Question 1 For the purpose of question 1, 2 and 3, AMCOR Limited and Bendigo and Adelaide Bank Limited shall be considered. More significantly we shall focus on the annual reports for the two firms to establish their organizational structure as well as leadership within the organizations. Bendigo and Adelaide Bank Limited is an Australian financial firm that operates basically in the retail banking sector. This organization is composed of senior directors and secretaries that disseminate their functions at diverse capacities. According to the 2011 annual report, Michael John Duff is the chairperson of the firm. He is the owner operator. Under Duff is Gordon Douglas Smale, the vice chairperson. Below these two are Tania Lyn Hansen and Maxwell William Papley, holding the positions of company secretary and retail rural merchandise proprietor respectively. Looking at the directors incentives, the company has no specific structure that defines the kind of shares to be held by a particular director. However, the entire committee receives an annual remuneration of $ 2000. The Branch Managers do not participate in decision making that affects the whole or a substantial part of the business, nor do they have the capacity to affect significantly the Company’s financial standing. On a rotational basis and by invitation, the Branch Managers attend Board meetings to provide Directors with an overview of their Branch’s performance. On the contrary, AMCOR Limited is a universal corporation in responsible worldwide packaging solutions. The company as well supplies a variety of plastic, fibre, metal and glass packaging goods. This firm is headed by three directors according to the 2010 annual report. CI (Chris) Roberts is the Independent Non-Executive Director and Chairman, KN (Ken) MacKenzie is the managing Director and Chief Executive Officer, whereas KJ (Karen) Guerra is the Independent Non-Executive Director. It is noted that the three top directors have a wide range of skills that enable them be effective in their respective positions. The annual directors’ interest report reveals that only the chief executive officer received interest based on performance. The rest of directors get their incentives according to the shareholdings. Question 2 Taking a close look at Bendigo and Adelaide Bank Limited’s cash flow, it is noted that the firm recorded net cash provided by operating activities of $ 397,814 in 2011 as opposed to $ 385,859 realized in 2010. This notably is an increase which must have been as a result of a higher interest received in the financial year 2011 as opposed to 2010. In addition, the company paid in income tax of $ 117,981 in 2011 and $ 216,020 in 2010. This may be another contributing factor to the increased cash flow in the operating activities for the 2011 financial year. Similarly, Bendigo and Adelaide Bank Limited’s cash flow reveals a considerable fluctuation in the net cash used in investing activities. In 2011, the corporation recorded $ (247,694) whereas $ (122,479) in 2010. The main contributing factor in the changes realized for the investment cash flow is attributed to the payment of intangible assets in 2011 which was higher as compared to the payments of share application in 2010 ($ 138,847 against $ 75000). Cash flow in financing activities reveals that Bendigo and Adelaide Bank Limited recorded a constant value of $ (128,166) for the two financial years. This is based on the fact that financial activities only came from dividends paid to the board of directors. AMCOR Limited recorded the following figures in the cash flow realized for the 2009 and 2010 financial years. The net cash from operating activities showed an increase from $ 673.7 in 2009 to $ 784.1 in 2010. This margin is basically attributed to an increase in trade and other payables for the company. On the other hand, the company recorded an increase in the cash flow from investing activities based on data realized in 2009 and 2010. This implies that the company decided to invest more and therefore money had to flow out of the company at a higher rate in 2010 as opposed to 2009. It is recorded that AMCOR Limited had $ (2917.6) in 2010 as compared to $ (574.2) in 2009. The main factor that led to this deviation is the increase in payments for acquisition of controlled entities, businesses and associates ($ 2454.5 from $ 151.8 the previous year). Lastly, the company recorded a profit margin in the cash flow from financing activities. In 2010, the company recorded $2303.3 as opposed to a loss of $ (211.6) in 2009. This is attributed to increased proceeds from share issues and calls on partly-paid shares in 2010. Question 3 Free Cash Flow = cash flow from operations – Capital expenditure Bendigo and Adelaide Bank Limited’s Free Cash flow (2011) = $ (397814 – 247694) = $150120 AMCOR Limited’s Free cash Flow (2010) = 784.1 – 2917.6 = - 2133.5 For any firm, it is imperative that the free cash flow is moderate. Having an extremely high free cash flow implies that the company is not investing hence cash flow from operations lies dormant (Kapil, 2011). According to Swanson, Srinidhi & Seetharaman, (2003), when the cash flow from operation activities offset the capital expenditure, the free cash flow will be as high as seen with Bendigo and Adelaide Bank Limited’s free cash flow valuation. On the contrary, cases of a negative free cash flow indicates that the firms net income is negative or the firm is making significant investments hence, increasing the investment needs (Ross, Westerfield & Jaffe, 2006). AMCOR Limited has a significantly negative free cash flow based on the fact that it is investing more than its operating cash flow. The negative free cash flow may result into the net capital expenditure and the working capital needs being larger than the net income (Stem & Chew, 2003). References: Kapil, S. (2011). Financial Management. Pearson: Pearson Education India Ross, S.A., Westerfield, R. & Jaffe, J. (2006). Corporate Finance. New York: McGraw- Hill/Irwin. Swanson, Z., Srinidhi, B. & Seetharaman, A. (2003). The capital structure paradigm: evolution of debt/equity choices. Sidney: Greenwood Publishing Group. Gaughan, P.A. (2010). Mergers, Acquisitions, and Corporate Restructurings. California: John Wiley and Sons. Stem, J. & Chew, D. (2003). The revolution in corporate finance. California: John Wiley & Sons. Question 4 Amount to be paid without interest = $ 10,000 Amount to be paid each year without interest =  = $ 2,000 Annual payment plus interest =  × 2000 = $ 2120 Question 5 She is now 30 years At 45 years, one child goes to university: requires = $ (10,000 + 11,000 + 12,000 + 13,000) = $ 46,000 At 50 years, another child goes to university: requires = $ (15,000 + 16,000 + 17,000 + 18,000) = $ 66,000 Retirement 60 years, after retirement for 40 years = $ (40 × 50,000) = $ 2,000,000 Total amount needed to meet the goals = $ (46,000 + 66,000 + 2,000,000) = $ 2,112,000 She is expected to have accumulated $ 2,112,000 within the 30 years while working Annual amount required =  = $ 70,400 But $ 70,400 includes interest earned on the principal Therefore, $ 70,400 = 112% 100% =  ×$ 70,400 = $ 62857.15 For each of the next 30 years, she is supposed to save $ 62,857.15 to meet her goals. In case she receives a gift of $ 400,000; then the accumulated amount has to be reduced. Her total savings for 30 years will change to (2,112,000 – 400,000) = $ 1,712,000 Annual amount required would have been  = $ 57066.67 $ 57066.67 = 112% 100% =  × $ 57066.67 = $ 50952.40 For each of the 30 years she should have saved approximately $ 50952.40 to meet her goals References: Kapil, S. (2011). Financial Management. Pearson: Pearson Education India Ross, S.A., Westerfield, R. & Jaffe, J. (2006). Corporate Finance. New York: McGraw- Hill/Irwin. Swanson, Z., Srinidhi, B. & Seetharaman, A. (2003). The capital structure paradigm: evolution of debt/equity choices. Sidney: Greenwood Publishing Group. Gaughan, P.A. (2010). Mergers, Acquisitions, and Corporate Restructurings. California: John Wiley and Sons. Stem, J. & Chew, D. (2003). The revolution in corporate finance. California: John Wiley & Sons. Read More