Sources of finance and Business Summary

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HA2032 CORPORATE ACCOUNTING ASSIGNMENT T2 14

Name of Student: ___________

Date of Submission: __/__/____

PART A

Going public by offering stock through an initial public offering, (IPO) will represent a milestone for Johnsons P/L. The main reason for most companies to go public is to obtain financing, and so is Johnsons P/L. When companies go public, they raise a lot of money and spread the ownership risk among large numbers of shareholders (Glen and Pinto, 2012). When the risk is spread, this factor is very crucial for the growth of the company. The two basic options available to raise money for medium-sized companies are debt financing and equity financing. Debt financing entails the long-term loans acquired from banks, whereas equity financing is the money from private investors, who in exchange get a share of owning the business.

a. Debt Financing

There are two types of debt, namely secured and unsecured debt. A debt is secured when collateral is involved, thus reducing lending risks. An unsecured debt offers higher risk to the lenders as they do not collateral recourse, thus attracts higher interest from the borrower (Madura, 2013). Debt is a liability to the company because interest and capital must be paid without regard of the cash flow. In case of bankruptcy, the bank must be paid first. This financing is relatively easy for small businesses, not for medium-sized businesses.

Advantages of debt financing over equity

  • Utilizes resources because no matter the situation, the company must pay back the money
  • It is advantageous for short-term needs
  • It offers a tax advantage to companies since the interest is deductible from the income tax
  • Lenders do not have a direct claim on the future earnings
  • This lending does not allow diluting the ownership of the business

Disadvantages of debt financing over equity

  • Requires regular payments with a principal amount and interest, which may be disadvantageous when the business is not making profit
  • In case of late or missed payment, lenders tend to imply penalties, which can affect the performance of the business negatively
  • There is limited availability to fully-established businesses, such as Johnsons P/L
  • The amount from debt financiers is very low, and in this situation, Johnsons P/L requires $60 million, which is very large

b. Equity Financing

This type of financing is more appropriate than any other source such as the bank loan, although it can place demands for the business (Porter and Norton, 2009).

Advantages of equity financing

  • Equity financing is committed to the business as well as the intended projects. When the business is performing, that is when investors realize their investment. For example, through stock market floatation (Frankel, 2013)
  • The company does not have to keep up with the demands of servicing bank loans, thus it allows the operations to use the capital to expand the business activities.
  • External investors expect the company to deliver value, thus help the management to explore all growth ideas.
  • When the capital is invested properly, it can the venture brings valuable skills, experience, and contacts in the business. The capitalists assist with those strategies and key decision-making.

Disadvantages of equity financing

  • Raising equity finance is time consuming, costly, and very demanding, and may take the management to focus away from the core activities of the business (Glen and Pinto, 2012).
  • Potential investors will always need comprehensive background information on the company, scrutinizing the past results and achievements of the forecasts.
  • Depending on the number of the investors, the company will only have a certain percentage of power to make key decisions
  • The management will have to invest extra time in providing the investors with the progress of the business
  • There are legal and regulatory issues that the business must comply with during equity financing

Therefore, the best alternative for Johnsons P/L will be equity financing as it offers more advantages.

PART B

Business Summary: Nuplex Industries Ltd (NPX)

Nuplex Industries limited use a developer, manufacturer, and seller of resins used in decorative, automotive, protective, and industrial coatings (Uk.finance.yahoo.com, 2014). They offer additives and resins such as liquid, solvent borne, and waterborne, as well as solid powder for several other industries and suppliers of paint, vehicle refinish, transportation, building and construction, white goods, consumer electronics, and infrastructure, as well as flooring and furniture goods. The company also provides composites such as vinyl ester resins and polyester, flow coats, and gel coats; distributes raw materials and Specialty chemicals to various industries and markets; and produces chemicals and resins used in producing pulp and paper products. Additionally, the company provides master batches; performance and colour additives for plastics; manufactures and distributes resins for situ flooring systems like the decorative floor coatings, hygienic non-slip floors, concrete floor sealers, elastomeric waterproof flooring, chemical-resistant flooring, and decorative seamless terrazzo floors for both industrial and commercial sectors. Further, Nuplex manufactures synthetic resins and emulsions, pre-mixed plasters, food ingredients, metal driers, and holds properties (Uk.finance.yahoo.com, 2014). The company’s main market includes Australia, New Zealand, Europe, Asia, and America. The company was founded in 1985 and its headquarters are in North Sydney, Australia.

Subsidiaries of Nuplex Industries Ltd

The company has more than 25 subsidiaries in different countries. In this paper, the main subsidiaries discussed are Multichem Pty. Ltd., and Asia Pacific Specialty Chemicals, Ltd. (APS). Multichem deals with supplying raw materials in New Zealand and Australia. It also offers various chemicals used in adhesives, carpet, food, agriculture and feed, paint, resin, ink, cosmetics and personal care, rubber industries, plastics and PVC (Businessweek.com, 2014). On the other hand, APS manufactures, exports, imports, and distributes specialty chemicals in New Zealand and Australia. Its operations are in different divisions, namely polymer and rubber, coatings, textiles and leather, food and nutrition, construction and adhesives, personal care, healthcare, process industries, and analysis and research.

NPAT for 2012 and 2013

The statutory net profit after tax was $43 million, a 31.5 % decrease from the previous year’s $63 million. The result included $13.8 million significant details, including the $5.6 million write-down for restructuring ANZ operations, a $5.5 million for Nuplex’s investment in Fibrelogic, an Australian based pipe manufacturer. However, the NPAT for 2013 was $56.8 million, which is considerably lower by 14.2 % than 2012 (Businessweek.com, 2014). Therefore, it would not be beneficial to invest in a company whose growth is either very slow, or negative as witnessed in the two years.

Security information

Nuplex Industries limited under the International securities identification issue Number (ISIN) NZNPXE0001S8 the company’s shares. The security type is ordinary shares under the primary/building sector (Uk.finance.yahoo.com, 2014). Their indices include NZX 50, NZX Mid Cap, NZX 50 Portfolio, and NZX ALL.

Audit at Nuplex Industries

The current external auditor for Nuplex Industries is PricewaterhouseCooper, Sydney. External auditors are employed by and report to the company’s audit committee. Although they are not part of the company, they play major roles in the development of internal control. They comment on weaknesses found in the accounting records, controls, and systems reviewed in the audit. External auditors provide statistical analyses on the effectiveness and clarity of the accounting policies run by the company. They assist the company’s management become aware of events that may affect the future financial accounting of the company (Porter, Hatherly and Simon, 2008). In other words, they advise the management and propose recommendations for future audits and accounting. The management of the company can use these discussions to improve their current documentation procedures, thus giving a more efficient documentation procedure following ethical and fair presentation. External audit procedures are very essential for the company since their opinions may affect the future financial position of the company.

PART C: General Journal

Johnsons P/L

General Journal

June 30, 2013

DATE

ACCOUNT

DEBIT

CREDIT

18th April 2013

Common Stock

$60,000,000

18th April 2013

Initial Payment account

$24,000,000

18th April 2013

Additional paid-in capital

$320,000

$320,000

12th May 2013

Accounts Payable

$15,000,000

30th June 2013

Accounts Payable

$21,000,000

TOTAL

$60,320,000

$60,320,000

References

  1. Businessweek.com, (2014). Multichem Pty. Ltd.: Private Company Information - Businessweek. [Online] Available at: http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=46948009 [Accessed 25 Aug. 2014].
  2. Frankel, M. (2013). Mergers and acquisitions basics. 1st ed. Hoboken, N.J.: Wiley.
  3. Glen, J. and Pinto, B. (2012). Debt or equity? 1st ed. Washington, D.C.: World Bank.
  4. Madura, J. (2013). International financial management. 1st ed. Mason, Ohio: Thomson/South-Western.
  5. Porter, B., Hatherly, D. and Simon, J. (2008). Principles of external auditing. 1st ed. Chichester, England: John Wiley.
  6. Porter, G. and Norton, C. (2009). Financial accounting. 1st ed. Mason, OH: South-Western Cengage Learning.
  7. Uk.finance.yahoo.com, (2014). NPX.NZ Profile | Nuplex Industries Limited Ordin Stock - Yahoo! UK & Ireland Finance. [Online] Available at: https://uk.finance.yahoo.com/q/pr?s=NPX.NZ [Accessed 25 Aug. 2014].

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