Print Email Download

Paid Writing Services

More Free Content

Get Your Own Essay

Order Now

Instant Price

Search for an Essay


The Financial Management Of Arrowlite Plc Finance Essay

Arrowlite plc manufactures vehicles and parts at 53 production sites in 27 countries and regions around the globe. Due to the financial instability caused by rising oil prices the company market situation is very deprived.

As Arrowlite plc is going through a difficult time in raising funds to finance operations and expansion. Because of that I assess of the company and I have identified mainly 2 things.

There is no clear strategy for the capital structure of the company and little understanding of the various finances available for the company.

The company Dividend policy is not going the way it should be, and the board of director don’t keep in touch on that.

There for I have given my recommendation on how we can come-up with the current situation with the help of the numerous source of finance available for the company and with marvelous facts why we have to give dividends for company shareholders.

Overvew of the Company

Arrowlite plc is a large listed company in automobile industry Arrowlite plc manufactures vehicles and parts at 53 production sites in 27 countries and regions around the globe. We make the highest quality cars with the fewest defects compare to our competitors, while using fewer man-hours and less on-hand inventory.

Market situation

Due to the financial instability caused by rising oil prices and subprime mortgage crisis the automobile markets continued to contract through 2008. This situation has worsened significantly in recent months and expected to persist in 2009. Despite the decline in sales, unit sales in Japan are relatively firm where we dominate the market share above 45%. However, sales in the United States were decreased to 2.2 million units in 2008 which is a 15 % decrease compare to 2007.

Vehicle sales for the third quarter of fiscal 2009

Financial statements of Arrowlite plc

Ratio Analysis for the period ending 12/ 2008 compared with the competitor

Ratios

Arrowlite plc

Delta plc

Gross profit margin

20.10%

33.10%

EBITDA

9.20%

12.30%

Asset turnover

0.8%

1.1%

Current ratio

1

1.1

Quick ratio

0.7

0.7

Debt/Common Equity Ratio

0.47

0.4

Interest Coverage

21.5

60.5

Inventory Turnover

10.6

7.3

Financial position

Advantages

Raising capital through equity can be a good choice for companies that are not ready for an IPO or are unwilling to finance expansion through debt.

An equity deal means that the company has access to business experts through its investors, who can help to steer the business strategically as well as financially.

Back to top

Disadvantages

Taking the equity route can lock a company into an agreement over a long time frame.

The company may have to surrender a large stake in return for investment, possibly as much as 50%, and also provide seats on the board.

Investors may interfere with the company’s business plan and other areas of strategic importance.

With either type of equity deal, there needs to be chemistry between the counterparties. Lack of chemistry can lead to board disagreements and other problems, souring the relationship.

It can be difficult for a company to extricate itself from an equity investment arrangement, depending on the terms of the deal.

Due to declining sales volume under the prevailing market conditions the revenues and profits have declined severely compare to our competitors. However the overall liquidity of the company is desirable compare to our main competitor, Arrowlite plc. On a consolidated basis, net revenues for the third quarter totaled $52.83 billion, a decrease of 28.4 percent compared to the same period last fiscal year. Operating income decreased to a loss of $3.96 billion and net income decreased from $1.35 billion in the 2nd quarter of fiscal 2009 to a loss of $1.81 billion in the 3rd quarter.

We estimates that consolidated vehicle sales for the fiscal year 2009 will be 7.32 million units, which is a decrease of 220 thousand units. We expects an annual revenues of $215.26 billion and an operating loss of $4.61 dollars, in comparison with fiscal 2008 levels of $269.59 billion and a $23.5 billion operating profit, respectively. In the first 2 quarters of fiscal 2009 we made an operating profit of $5.9 billion but for the last two quarters, we expects to incur an operating loss of $7.4 billion.

Capital Structure

Capital structure refers to the kind of securities that make up the capitalization that is debt and equity securities that comprise a firm’s financing of its assets. Equity and debt are the two principal sources of finance for our business. But there is no comprehensible strategy in our company.

In order to run and manage the company funds are needed, as you know finance play an important role in company. If funds are inadequate, the business suffers and if the funds are not properly managed, the entire company is going to suffers.

It is, therefore, necessary that a correct estimate of the current and future need of capital be made to have an optimum capital structure, which will help an organization to run its work smoothly and without any stress.” Sharma and Rai (2000) Estimation of capital requirement is necessary, but the formation of a capital structure is important. According to Gerstenbeg(1988).

Capital Structure Decision Process

Existing Capital Structure

Desired Debt-Equity Mix

Capital Budgeting Decision

Modernization

Expansion

Diversification

Replacement

Payout Policy

Need to Risk Funds / Sources of financing

General Funds

Debt

External Equity

Capital Structure Decision

Effect on Return and Risk

Effect on coat of capital

Value of the firm

Capital Market efficiency

In an efficient market, all the available information of a firm will reflect its share prices with respect to the direction and the size of that movement. Therefore in an efficient market, investors will not get the opportunity to make abnormal return through either doing a technical or fundamental analysis. Investors and companies do not need capital market to be perfect but rather efficient.

Implications for the managers if the market is efficient

The share prices of a company will reflect its value and market expectation about its future performance. Therefore, financial managers have to make good financial decision to maximize shareholder’s wealth because the market will interpret these decisions correctly and the share price will adjust accordingly. By showing impressive company performance using creative accounting will not mislead the market. The timing of security issues is not important because if the market is efficient shares are never underpriced or overpriced. In an efficient market equity financing requires a rate of return which is fair because the price has already reflected all available information and every alternative way of raising capital would require the same rate of return for the same project and no one capital raising method is superior than other. In an efficient market there is no need to put advertising about the company’s past performance because stock price has already reflected those and therefore there is no impact on stock price.

Implications for investors if the market is efficient

Investments research is a waste of money because it will not produce abnormal returns and there are no underpriced share found on stock market if the market is efficient. Analyzing published statements of financial analysts and investment tips will not produce abnormal returns because the all available information is reflected in the share price.

Source of Finance available

When we look at our history generally we are doing long term projects. Even though we are large company, company is going through difficult time to raise finance operation and expansion. But in my view we have several sources of finance available for Long term projects. Such that:-

Ordinary shares

Ordinary share holders have the right to share in the wealth and profits of the company. These shareholders can also exercise control over management of the company by means of their right to vote at general meetings. They have the right to receive dividends but dividends are not guaranteed because profits will vary from year to year, in some years there is nothing to pay as dividends but in good years large amounts of dividends will paid. Company can issue ordinary shares in order to raise finance for long-term financial needs.

Advantages of ordinary shares to the company

Usually there is no obligation to pay dividends

The capital is permanent and need not be repaid

Equity share does not create any charge over the assets of the company

Disadvantages of ordinary Shares to the company

Normally it costs more to issue new shares than to raise the same amount of debt.

There is a real danger of losing control, if one shareholder can acquire enough shares in the secondary market.

Company pays tax on the dividends it pays out.

Preference share

Unlike ordinary shares preference shares are usually promised annual fixed dividend and it isn’t obliged to pay preference dividend. However if profit is available for distribution after paying debt, preference dividends must be paid and what is left over can be used to pay ordinary dividends. Normally preference shareholders do not have a say in corporate matters unless dividends are in arrears. Different types of preference shares are cumulative, participating, redeemable or convertible.

Advantages of preference shares to the issuing company

Preference dividends do not need to be paid if profits are insufficient to cover them.

No dilution of ownership because preference shares do not carry voting rights.

Preference shareholders do not have the right to appoint a receiver in the case when the company did not pay dividends.

Preference share capital provides long-term capital to the company without any fixed charge on the assets.

Disadvantages of preference shares to the issuing company

Expensive source of finance compare to debt.

Preference share have a tax disadvantage since dividend on preference shares is not a deductable expense whereas interest on debentures is deductible expense.

In case of delayed payment of dividend, there is a chance of dilution of control.

Retained profit

Retain profit is one of the most important source of long term equity finance available to companies. Retained profits belong to the shareholders but they allow the management to invest retain profits in new projects.

Advantages to the company by using retained profits for new investment

Retained profits have no issue cost and it is the most cheaper source of finance

Retained profits do not involve any floatation costs

Retained profits are easily obtainable and there no dilution of control

No restrictions on business operations as might arise when issuing new debt.

Disadvantages to the company by using retained profits for new investment

There is an opportunity cost to the company

Shareholders giver permission to invest retained profits to produce the same return on new investment as the existing return of equity

Loan stock and Debentures

Loan stock and debentures are two main types of long term bonds and the interest for the bonds is paid normally at a fixed rate. Loan stock and debentures holders are long term creditors of the company because the par value is the debt owed by the company and interest is paid at a stated coupon yield on the par value. Loan stock and debentures are usually issued for five years period and by the end of that period they will mature and become redeemable. Though these two terms are used interchangeably there is a difference. Loan stock is an unsecured loan with a fixed interest rate and repaid at a future date. Debenture is a type of loan stock which is secured by the trust deed against the asset of the company and debentures of public companies can be traded on the stock exchange like shares.

Advantages of Loan stock and Debentures

Loan stock and debentures are cheaper source of capital

Interest cost is usually less than the dividend paid on shares and issuance cost is less than the cost for any other form security.

Tax benefits are available

No dilutions of ownership because debenture holders do not have any voting rights.

Disadvantages of Loan stock and Debentures

The fixed interest charges become fixed burden on the company which has to be paid even if there are no profits.

Non-payment may lead to legal complications and may even end up in winding up of the company.

Use of debt financing increases the risk perception of the firm

Convertible loan stocks

Convertible loan stocks are a form of debt that carries the right for the holder to convert his or her investment into shares at a specified future date and price. The right to convert is an option and the holder has no obligation to convert. The holder can convert to get the benefits if the market value of share price is greater than agreed price on the agreed conversion date. Convertible loan stock holders will get a specified interest payments but the interest rate will be lower compare to other loan stock because the right to convert will give extra benefits to the holder.

Advantages of convertible loan stock to the company

The issuance of convertible loan stock allows for a lower interest rate on the financing compared to issuing straight debt.

A convertible loan stock may be issued in a tight money market when it is difficult to a credit worthy firm to issue straight bond or preference share.

Convertible loan stocks usually involve fewer financing restriction than straight debt.

Convertible loan stocks provide a means of issuing equity at a price higher than current market price.

Disadvantages of convertible loan stock to the company

If the company’s share price increase appreciably in value, the company would have been better of financing through a regular ordinary share issue at higher price rather than allowing a conversion at the lower price.

The company is obliged to pay the convertible debt if the share price does not rise.

Eurobonds

Eurobond is form unsecured long term debt finance for companies who need funds for international investment. Eurobonds are issued and largely sold internationally in a currency different from the issuer’s home currency. Usually interest may be paid annually at a fixed or variable rate to the holder in the currency which the bond is issued.

Advantages of Eurobonds to the company

Smaller issuing cost than national bond issue

Attracting more amounts on longer time period

Protective possibilities against currency risk and unfavourable evolution of the interest rate

Accessible only for big companies who have access on international markets

Disadvantages of Eurobonds to the company

Loss possibility because of unfavourable currency exchange differences

Being bearer title there is the possibility of steeling

Recommendation

As we know Company finance is just like a blood in a human being. Without availability of proper funds a company cannot run smoothly even for a single day. From my past investigate about the company I found there is no proper strategy for the capital structure in the company. However to manage funds effectively and efficiently is very important. Every decision with regard to finance should be taken in a very professional manner. Actually it is team efforts and thus coordination is very important. If not company will face many deficits and the investors who want invest will be less. For those reasons I suggest the company should follow the clear strategic plane of the capital structure of the company and have to take a write source of finance available. Since our company is large and we do long term projects, we can use one of the above, but we have to plane the project and then we have to select the right source of finance for that project.

Dividend decision

Dividend policy has the effect of dividing net earnings into retained profits and dividends. The retained profits provide funds to finance the long-term growth of the organization and it is one of the most important sources of finance available for future investments. Dividends are usually paid in cash and if we intend to pay dividends to shareholders, we have to use external sources of funds to finance our future investments. Therefore dividend policy has its effect on both the long term finance and wealth of shareholders. If we decide the dividends as a long term source of finance, dividend will be paid only when we don’t have any profitable future investments. The growth rate of the company will be very high by accepting all the profitable investments since retained profits do not involve any floatation costs unlike external sources of finance. However if we paid dividend to shareholders, we cannot reinvest the distribution earning in a profitable way. This dividend decision is viewed as a residual dividend policy.

If we decide to pay dividends in order to maximize the wealth of shareholders, we have to forego some investment opportunities. In practical world, capital markets are not perfect as result shareholders may give higher value to the near dividends than the future dividends and capital gains. The payment of dividends affect the market price of shares and if we pay higher dividends the price of shares will increase and if we pay lower dividends the value will be decreased. Therefore to maximize shareholder wealth we have to pay enough dividends to satisfy investors and this dividend decision is viewed as a stable dividend policy.

However when we increase the retained profits to finance profitable investments, the future earnings per share will be increased but by decreasing the dividends paid to shareholders will adversely affect the market price of the shares. Moreover if the dividends paid to the shareholders are increased there may be a favourable effect to the market price of shares but we have to forego profitable investments that will definitely reduce the future earnings per share of the company. Therefore we have to develop a dividend policy which divides the net earnings into dividends and retained profits in an optimum way to maximize the wealth of share-holders. When deciding a dividend policy we have to make a balance between the above two policies and we have to consider that dividend policy will be greatly influenced by these factors.

Small shareholders

Retired and old persons

Wealthy investor

Institutional investors

Tax treatment

Financial needs of the company

Most of the shareholders have a desire to receive dividends while some of the shareholders are interested in capital gains. However the amount of earnings to be distributed as dividends depends on the legal restrictions, liquidity and financial condition and investment opportunities available to the organization. Further in practice the dividend policies will be influenced by two factors. The first factor is the industry or commercial sector within which the company operates. Companies operating in industries that require a large amount of long-term investments are found to have lower payout ratios and companies operation in industries associated with higher risks will pay a lower payout ratio to avoid fluctuating dividend payments in future. The second factor is the nature of the company and its individual characteristics. A company which has reached the maturity stage of its life cycle may choose to pay a high dividend payout ratio while a company which has high level of bank borrowings relative to other companies in the industry may choose to pay a low dividend payout ratio.

As our company dividend policy is not effectively managed and i found that board of directors feels this is not an important area. Because of this the company is going down in fiscally. Therefore my recommendation is to flow a constant dividend payout ratio and with this policy the amount of dividend will fluctuate according to the earning of the company. If not the company will face a terrible days in all the way company goes.

Conclusion

As we know our company is going through a difficult time in raising funds to finance operations and expansion. Because of that I assess of the company and I have identified mainly 2 things.

There is no clear strategy for the capital structure of the company and little understanding of the various finances available for the company.

The company Dividend policy is not going the way it should be, and the board of director don’t keep in touch on that.

Therefore as I company senior management accountant I have given my recommendation that I feel how we can recover the company current situation.

References

Financial management text book

Denzil Watson and Antony Head, (2007), Corporate Finance, Person Education, UK

 A., Stoltz, M., Viljoen, (2007), Financial Management, Person Education, South Africa

Ross, Westerfield, and Jordan, (2003), Fundamentals of Corporate Finance, McGraw-Hill, USA

Frank J.,Fabozzi, and Pamela P., Perterson, (2003), Financial Management and Analysis, John Wiley & Sons, Canada

Aidan Berry, (2004), Financial Accounting an Introduction, International Thomson Publishing, UK

Print Email Download

Share This Essay

Did you find this essay useful? Share this essay with your friends and you could win £20 worth of Amazon vouchers. One winner chosen at random each month.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:

Request the removal of this essay.


More from UK Essays

Need help with your essay?

We offer a bespoke essay writing service and can produce an essay to your exact requirements, written by one of our expert academic writing team. Simply click on the button below to order your essay, you will see an instant price based on your specific needs before the order is processed:

Order an Essay - via our secure order system!