On the other hand, loan capital is a borrowed fund that has a fixed interest which a company should pay no matter its financial conditions.
Aztec would enjoy several advantages from raising fund from the share capital. First, the company will be able to raise cheap fund from the public making the company to pay only dividend to shareholders which is just a little percentage from the company net profits. Moreover, the risk of losing capital is spread on large number of people and not just founders of the company. More importantly, shareholders are likely to regards their shares as long-term investment thereby stick to company in a good or bad time. The only shortcoming of share capital as source of fund is that the larger percentages of shares should not be in possession of external investors because possession of larger percentages of shares will make external investors to have great influence on the company. (Danielson, and Scott 2006)
By relying on loan capital, Aztec Catering may increase its overall leverage which may make the company to face the risk of long-term debt financing consequent leading to the risk of bankruptcy.
Thus, the paper provides the 3-year financial plan to assist the company to meet its corporate objectives. The projected profit and loss table reveals that the Aztec will record net profits of £37 Million in 2013, £47 Million 2014 and £81 Million 2015. Based on the data presented in the company-projected balance sheet, the company total assets will be £522 Million in 2013, £555 Million in 2014, and £620 Million in 2015. The total assets include the current assets, non-current assets, equipment, building and land. The financial plan will assist the company to achieve the following corporate objectives:
To maintain a profit margin of 24%
To maintain current strong financial position of the company
"To satisfy the shareholder by maintaining a dividend payout ratio of 50%"
Aztec Projected Profit and Loss (£000)
31/12/2013
31/12/2014
31/12/2015
Revenue
Gross revenue
£120 000
£150 000
£190 000
Cost of goods sold
10 000
10 200
10 608
Gross margin
£110 000
£139 800
£179 392
Other revenue [source]
£0
£0
£10 000
Interest income
$1 000
£0
£0
Total revenue
£111 000
£139 800
£189 392
Operating expenses
Sales and marketing
£10 000
£10 200
£10 608
Payroll and payroll taxes
15 000
£15 300
£15 912
Depreciation
8 000
8 100
8 500
Insurance
8 500
£8 670
£9 017
Maintenance, repair, & overhaul
1 500
15 300
15 600
Utilities
2 500
£2 550
£2 652
Property taxes
3 000
£3 060
£3 182
Administrative fees
2 000
£2 040
£2 122
Other
4 000
£4 080
£4 243
Total operating expenses
£54 500
£69 300
£71 836
Operating income
£56 500
£70 500
£117 556
Interest expense on long-term debt
3 590
2 866
2 106
Operating income before other items
£52 910
£67 634
£115 450
Loss or gain on sale of assets
0
0
1 000
Other unusual income expenses
0
0
0
Earnings before taxes
£52 910
£67 634
£116 450
Taxes on income
30%
15 873
20 290
34 935
Net income (loss)
£37 037
£47 344
£81 515
Dividend
£18,518.5
£23,672
£40,757.5
Retained profit
£18,518.5
£23,672
£40, 757.5
Aztec Caterings Projected Balance Sheet (£000)
Assets
Initial balance
Year 1
Year 2
Year 3
Cash & short-term investments
£30 000
£100 559
£141 801
£214 855
Accounts receivable
3 000
3 000
3 000
3 000
Total inventory
27 000
27 000
27 000
27 000
Prepaid expenses
0
0
0
0
Deferred income tax
0
0
0
0
Other current assets
Total current assets
£160 000
£230 559
£271 801
£344 855
Buildings
£100 000
£100 000
£100 000
£100 000
Land
Capital improvements
0
0
0
0
Equipment
Less: (Accumulated depreciation expenses)
0
8 000
16 100
24 600
Net property/equipment £300 000
£292 000
£283 900
£275 400
Goodwill
$0
$0
$0
$0
Deferred income tax
0
0
0
0
Long-term investments
0
0
0
0
Deposits
0
0
0
0
Other long-term assets
0
0
0
0
Total assets
£460 000
£522 559
£555 701
£620 255
Liabilities
Initial balance
Year 1
Year 2
Year 3
Accounts payable
£2 000
£2 000
£3 000
£3 000
Accrued expenses
0
0
0
0
Notes payable/short-term debt
0
0
0
0
Capital leases
0
0
0
0
Other current liabilities
60 000
60 000
60 000
60 000
Total current liabilities
£0
£62 000
£63 000
£63 000
Long-term debt derived from the loan payment calculator
£40 000
£65 522
£50 320
£34 358
Other long-term debt
Total debt
£102 000
Cash Flow and Net Present Value
As being presented in the cash flow table, the company cash balance at the end of the fiscal years 2013, 2014, and 2015 will be £101 Million, £142 Million, and $215 Million respectively. The paper also calculates the cost of capital using weighted average cost of capital (WACC) and the calculation is as follows:
Cost of Capital= k (1-T)
Where k= Interest Rate
Where T= Tax Rate
Interest Rate= 10%
Tax Rate=30%
Cost of Capital = Interest Rate (1- Tax Rate)
Cost of Capital =10%( 1-30%)
Cost of Capital=7%
Using the data in the cash flow and the cost of capital, the paper calculates the NPV of the Aztec proposed investment to determine whether the investment will increase the shareholders value.
Aztec Catering Cash flow (£000)
2013
2014
2015
Operating activities
Net income
£37 037
£47 344
£81 515
Depreciation
8 000
8 100
8 500
Accounts receivable
0
0
0
Inventories
0
0
0
Accounts payable
0
1 000
0
Amortization
0
0
0
Other liabilities
0
0
0
Other operating cash-flow items
0
0
0
Total operating activities
£45 037
£56 444
£90 015
Investing activities
Capital expenditures
£0
£0
£0
Acquisition of business
0
0
0
Sale of fixed assets
£0
£0
(£1 000)
Other investing cash flow items
0
0
0
Total investing activities
£0
£0
(£1 000)
Financing activities
Long-term debt financing
£25 522
(£15-202)
(£15-962)
Preferred stock
0
0
0
Total cash dividends paid
0
0
0
Common stock
0
0
0
Other financing cash flow items
0
0
0
Total financing activities
£25 522
(£15-202)
(£15-962)
Cumulative cash flow
£70 559
£41 242
£73 053
Beginning cash balance
£30 000
£100 559
£141 801
Ending cash balance
£100 559
£141 801
£214 855
Discounted Cash Flow
£77,353.3
£83,906
£97,795
Net Present Value (£000)
Year
Cash-in
Net Cash Flow
Discounted Cash Flow
0
-90,000
-90,000
-90,000
1
100,559
100,559
77,353.3
2
141,801
141,801
83,906
3
141,801
141,801
97,795
Net Present Value.
£63.7 Million
Using discounted cash flow to calculate the net present value, the net present value is £63.7 Million because the present value of the expected cash flow is £153.71, which is larger than £90 million invested in the project. The investment will increase the wealth of shareholders because the returns of the investment are greater than the actual funds put in the project.
Conclusions
Appraisal carried out on Aztec corporate objectives reveals that the company needs to rely more on share capital than raising fund from the bank loan. The financial plan carried out will assist the company to meet its corporate objective. More importantly, the cash flow and net present value are used to determine whether the proposed investment will add value to shareholder. Investment appraisal carried out reveals that the net present value is greater than one showing that the present value of the expected cash flow is greater than the actual fund invested in the project making the paper to recommend that the company should pursue the project.
List of References
Afonso, a. (2009). Determinants in using of capital investment appraisal methods: Evidence from the field. Department of Production and Systems University of Minho.
Barclays (2012).UK Hospitality and Leisure Sector outlook Third quarter 2012. Corporate Banking, Barclays Bank PLC.
Businessweek (2012). Compass Group Plc (CPG:London). Bloomberg. UK.
Clarke, P.J. (2002). Account Infor for Managers. Cengage Learning EMEA.
Danielson, M.J. Scott (2006) "The capital budgeting decisions of small firms," Working Paper, Saint Joseph's University, Philadelphia, p. 25.
Ernst & Young (2012). Pubs and Restaurants Outlook. Ernst & Young UK.
MorningStar.(2012). Compass Group PLC CPG. MorningStar UK.
NAFTA Historical Beginning of NAFTA (with specific bibliography) NAFTA Objectives What is NAFTA The Promise of NAFTA NAFTA Provisions Structure of NAFTA Years of NAFTA (NAFTA not enough, other plus and minuses).. Environmental Issues Comparative Statements (Debate) NAFTA - Broken Promises NAFTA - Fact Sheet Based Assessment NAFTA & Food Regulation NAFTA - The Road Ahead NAFTA in Numbers Goal Fulfillment Major Milestones Consolidated Bibliography This study set out to examine the inner workings of the North American Free Trade Agreement. The aim of this study is
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