MOD006884 International Finance Assignment Sample
Module Code And Title – MOD006884 International Finance Assignment Sample
Introduction
International finance is primarily known as “international macroeconomics”. This is useful for studying monetary conversions or interactions between countries. This funding focuses primarily on exchange rates and “foreign direct investment (FDI)”. International financing helps to increase globalization, which is very important in finance. Between two or more countries, this financing addresses their economic interactions and also focuses on the business market. This international finance contains many models and theories and those are analyzed based on the company’s ratio, current NPV valuation and capital asset pricing model.
This particular report includes the ratio calculation for the original company, named SYNERGY POWER LTD, which helps the corporate investor to take investment decisions and help them to invest. This report also describes the proxy company, named the Solid state, and uses the “Capital Asset Pricing Model” and “dividend model” to classify the difference between these two companies.
It will help to understand the NPV of these two companies and their ratios, which have a huge impact on the investment. This calculation provides a clear idea of investment options and their financial position in the business market.
Discussion
Part A
Introduction of proxy company
In this report the chosen proxy company is Solid state, which is one of the biggest manufacturing companies. The solid state is mainly known as their “specialist design distributor” for the electronics industry. The main power of this company is to give their customer a battery solution and specialized industrial computer. In this decade solid state companies were recognized as a tending brand for the electronic industry. They give their customers high quality product and service assistance, for that reason this company establishes their value in the manufacturing business market.
In this assignment the growth of the solid-state company is highlighted because of their ratios and their positive NPV calculation (Alim and Ali, 2021). This company’s NPV is the huge factor for the investment and after calculating all the data it shows that the NPV of the solid state is positive. This solid-state company established their impact in the electronics industry and nowadays the opportunity in the electronic market is huge.
The original company, SYNERGY POWER LTD’s NPV valuation is shown to be negative, for that reason the Solid-state company is chosen because their NPV is positive and this will give a better comparison between these two companies.
The next part of this assignment will broadly discuss these two companies’ ratios and their NPV calculation (Bricker et al. 2019). Those calculations and their discussion will help to understand the company’s current business scenarios and help the investor to take investment options, that is which companies’ investments give them better return and risk-free return on the basis of the investor investment.
Ratios of SYNERGY POWER LTD
Ratio calculations help to understand how organizations run their business effectively and with efficiency. This provided an important accounting instruction based on the performance of the organization.
| “Profitability Ratios” | |||||
| “Sales Growth” | “(Turnover2011- Turnover2010) / Turnover 2010” | -36% | na | ||
| “Gross Margin” | “Gross Surplus / Turnover (Sales)” | 65% | 64% | ||
| “Net Profit Margin” | “Net Surplus / Turnover (Sales)” | 30% | 34% | ||
| “ROCE” | “EBIT / Capital Employed = EBIT / (Debt+Equity)” | 6% | #DIV/0! | ||
| “ROTA (Return on Total Assets)” | “EBIT / Total Assets” | ||||
| “Net Asset Turnover (times)” | “Sales / Capital Employed” | 0.15 | #DIV/0! |
Table 1: Profitability ratio (Source: given)
The profitability ratio is a type of ratio analysis that helps to determine the company’s profit throughout the year. In this above table it is shown that the SYNERGY POWER LTD profitability ratio. From this ratio it is seen that the company will not be able to grow there in 2020. And their net profit margin will also decrease in 2020 than the year 2019.
After analyzing this company’s profitability ratios, it is told that this company did not run their business in profit (Chawda and Patel, 2020). For their profit maximization they will need to look after their sales and try to increase their sales. If they consider this issue, they will be able to run their business in profit.
| Leverage Ratios | |||||
| “Debt-to-Equity ratio (%)” | “Long-term debt capital /share capital and reserves ×100” | 6% | #DIV/0! | ||
| “Capital Gearing ratio (%)” | “Long-term debt capital /capital employed × 100” | 6% | #DIV/0! | ||
| “Interest Coverage ratio (times)” | “EBIT / interest charges” | 36 | 64 |
Table 2: Leverage ratio (Source: given)
| “Investor Ratios” | |||||
| “P/E (times)” | “Price / EPS” | 0.2 | 0.1 | ||
| “EPS (pence)” | “Net Income / Number of outstanding shares * 100” | 47.24 | 86.12 | ||
| “ROE” | “Net Income / Shareholder’s Equity” | 5% | #DIV/0! | ||
| “Dividend cover (times)” | “EPS / Dividend per share” | 55.58 | 101.32 | ||
| “Dividend Yield (%)” | “Dividend per share / Share price*100” | 8.5 | 8.5 |
Table 3: Investor ratio (Source: Given)
The investment ratio helps to calculate the net income from the total annual sales. In finance, the investment ratio helps measure a company’s risk factors, and investors invest in the company based on these risk factors.
In this above table it is calculated the ratios of SYNERGY POWER LTD and this ratio will help the investor to make decisions about their investment further. The ratio calculation is for the last two years and those give the proper information about the current position of the company.
The investor ratio gives the clear idea about the investment and in this table, it is seen that the ratio valuation is increasing from the last year and the dividend rate of this ratio is the same for the two years but the cover of the dividend is 50% decreased in 2020. In 2019 the dividend cover is 101. 32 approximately but in 2020 it is seen that the value is 55.58. And the earning per share is also decreased as it is seen in the calculation table (Gao et al. 2020).
On the other hand, the gross profit margin in sales has slightly increased compared to the past year that is 2019 but their net profit is decreasing. From the all-calculated ratio, it is said that the growth of this company is now diminishing and their market value decreased as well.
Ratio calculation of Solid-state company
| “Profitability Ratios” | |||||
| “Sales Growth” | “(Turnover2011- Turnover2010) / Turnover 2010” | 20% | na | ||
| “Gross Margin” | “Gross Surplus / Turnover (Sales)” | 31% | 29% | ||
| “Net Profit Margin” | “Net Surplus / Turnover (Sales)” | 5% | 5% | ||
| “ROCE” | “EBIT / Capital Employed = EBIT / (Debt+Equity)” | 17% | 12% | ||
| “ROTA (Return on Total Assets) | EBIT / Total Assets” | 11% | 8% | ||
| “Net Asset Turnover (times) | Sales / Capital Employed” | 2.81 | 2.25 |
Table 4: Probability ratio (Source: Given)
In the above table it is shown the profitability ratio of Solid-state companies. The growth of their sales is 20% as seen above (Huang et al. 2021). For their efficient productivity they perform much better in 2020 than 2019. Their profit margin is also increased than 2019 and their company’s turnover and return also perform in a better way than the original company, SYNERGY POWER LTD.
| “Liquidity Ratios” | |||||
| “Current (Working Capital) ratio | Current Assets / Current Liabilities” | 1.85 | 2.05 | ||
| “Acid test ratio (Quick) ratio | (Current Assets – Inventories) / Current Liabilities” | 0.00 | 0.00 | ||
| “Cash ratio | Cash and Cash Equivalents / Current Liabilities” | 0 | 0 |
Table 5: Liquidity ratio (Source: Given)
In financial measurement, the liquidity ratio helps to measure a company’s current funds. In this ratio calculation, an organization understands its ability to “pay debt”. It also measures the “safety margin of the Solid-state organization.
| Leverage Ratios | |||||
| “Debt-to-Equity ratio (%) | Long-term debt capital /share capital and reserves ×100” | 7% | 26% | ||
| “Capital Gearing ratio (%) | Long-term debt capital /capital employed × 100” | 6% | 21% | ||
| “Interest Coverage ratio (times) | EBIT / interest charges” | 34 | 27 |
Table 6: Leverage ratio (Source: Given)
| “Investor Ratios” | |||||
| “P/E (times) | Price / EPS” | 0.3 | 0.4 | ||
| “EPS (pence) | Net Income / Number of outstanding shares * 100” | 39.93 | 31.1 | ||
| “ROE | Net Income / Shareholder’s Equity” | 15% | 13% | ||
| “Dividend cover (times) | EPS / Dividend per share” | 249.6 | 194.3 | ||
| “Dividend Yield (%) | Dividend per share / Share price*100” | 1.5 | 1.5 |
Table 7: Ratio calculation (Source: Given)
The investment ratio helps to calculate the net income from the total annual sales. In finance, the investment ratio helps measure a company’s risk factors, and investors invest in the company based on these risk factors. In this above table it is calculated the ratios of Solid state and this ratio will help the investor to make decisions about their investment further. The ratio calculation is for the last two years and those give the proper information about the current position of the company.
From the above ratio calculation of Solid state, it is said that this company position is better than the above-mentioned company (Johansson and Olofsson, 2019). It is a manufacturing limited company. In this company it is seen that the dividend yield is the same for 2019 and 2020 and the dividend cover is high from SYNERGY LTD. The investor ratio helps to make a decision on the investment and in this Solid state the investment ratio is better than the 2019, for that reason the company establishes their goodwill in the business market and many investors will invest in their company.
And the gross margin of their sale is also high as seen in the calculation for that reason they will earn a better net profit against their service and for all those calculations it is said that Solid state runs their business in profit and establishes a good image in the business market.
Comparison between SYNERGY POWER LTD and Solid-state company on the basis of their ratio calculation
From the above ratio calculation of SYNERGY POWER LTD, it is seen that their performance is low because of their lack of productivity and their efficiency. On the other hand, the growth of the proxy company, Solid state is significant, because of their new innovation of technology and productivity. Their ratio shown was increased in 2020 than 2019.
And the performance of their ratio is better than the original company, SYNERGY POWER LTD. The profit margin of the solid-state company is also high from the SYNERGY LTD and the company will be able to give a better turnover than the original company (Li et al. 2020). For that reason, the Solid-state company’s risk factor is also reduced and this will give them the opportunity to get a better investment from their investor.
Part B
CAPM and DVM
The CAPM indicates the “capital asset pricing model” that helps to understand the company’s companies’ securities and their financial model. And this model helps to identify the risk on the investment and the return on the investment. This model helps to increase the company’s cost of equity and develop their financial position by giving them a fair statement of their investment position and help them to create a budget for their upcoming expenses (Liang et al. 2018).
By the help of this model investors make decisions about their further investment and the risk and return of their investment because it gives a clear-cut idea about the company’s current position in the market.
| “CALCULATE WACC BY USING Ke from DVM” | ||||||||
| “Type” | “Amount” | Weighting | “Cost” | WACC | ||||
| “Equity” | 50,00,00,000 | 94% | 0.1302 | 0.122872 | ||||
| “Alpha loan” | 2,00,00,000 | 4% | 0.02106 | 0.000795 | ||||
| Bank | 1,00,00,000 | 2% | 0.02592 | 0.000489 | ||||
| Total | 53,00,00,000 | WACC | 0.124156 | |||||
| OR | 12.4% | |||||||
Table 8: WACC calculation (Source: Given)
| “CALCULATE WACC BY USING Ke from CAPM” | ||||||||
| Type | Amount | Weighting | Cost | WACC | ||||
| Equity | 50,00,00,000 | 94% | 0.1027 | 0.096929 | ||||
| Alpha loan | 2,00,00,000 | 4% | 0.02106 | 0.000795 | ||||
| Bank | 1,00,00,000 | 2% | 0.02592 | 0.000489 | ||||
| Total | 53,00,00,000 | WACC | 0.098213 | |||||
| OR | 9.8% | |||||||
Table 9: CAPM model (Source: Given)
| “Cost of Equity using CAPM” | |||||
| “Rm | 0.0775 | ||||
| Rf | 0.001 | “Rm – Rf” | 0.077 | ||
| Beta” | 1.33 | ||||
| “beta (Rm-Rf)” | 0.101745 | ||||
| “Rm+ Beta(Rm-rf” | |||||
| 0.103 | |||||
| “Cost of Debt” | tax | 0.19 | |||
| “Alpha | Interest” | 0.026 | 0.00494 | 0.02106 | |
| 0.02106 | |||||
| Bank | Interest | 0.032 | 0.00608 | 0.02592 | |
| 0.02592 |
Table 10: Cost of debt using CAPM (Source: Given)
The DVM helps to calculate the cost of equity and helps to assume the “market price of a share and helps to calculate the future dividend and return on the investment. For that reason, the investor will access their future income on their investment (Nahmer, 2019). The RM of the company shows 0.0775, and the rf is 0.001 and the beta is calculated 1.33. Obtaining the actual result of beta, the value of rf will be minus from the rm value. After doing this process actual beta will be counted 0.101 approximately.
| “Cost of Equity using DVM” | ||
| D0 | 0.85 | |
| P0 | 10.00 | |
| g | 0.04 | |
| “D0(1+g)” | 0.885445 | |
| “D0(1+g) / P0” | 0.088545 | |
| “Ke=[D0(1+g)/P0] + g” | 0.1302 |
Table 11: DVM calculation (Source: Given)
| “Cost of Debt” | “Tax Shield” | 0.19 | ||
| Alpha | Interest | 0.026 | 0.00494 | 0.02106 |
| 0.02106 | ||||
| Bank | Interest | 0.032 | 0.00608 | 0.02592 |
| 0.02592 |
Table 12: Cost of debt calculation (Source: Given)
From the above table by using the DVM it will calculate the cost of capital and cost of debt that will help to assess the future income and the return on investment for the investor.
Traditional and modern techniques of capital rising
The capital raising is a technique to raise capital for the business growth and increase the valuation of the business. For earning profit in the future, every organization takes decisions about the capital rising in the present. For raising the capital there are four ways that help the organization (Nanayakkara et al. 2021). One is to borrow capital from their early investor, next one is to take a loan from a bank or any other financial institute, third one is selling their excess amount of stock and the last one is to reinvest their profit.
Pros and cons of capital rising
Pros
When the business is run by the owner and also capital introduced by the owner, then there is no concern about the payment of interest or other investor. They run their business independently. If the business is constructing their capital on the basis of traditional financing, that is they take a loan from the bank or other financial institute or they sell their companies equity to the investor then it is a more easy and convenient way for capital sourcing (Ye et al. 2020).
By following a traditional capital raising process rather than a self-funded process, it is less time consuming and the organization has a chance to grow their business in a quick way.
Cons
Self-funding by the owner is risky and also expensive. If any disaster happens in the organization, then the owner is fully responsible and it has a chance that they may run their business in a loss if any disaster happens. On the other hand, if the organization raises their capital from outsourcing, they will be liable to pay interest to the bank or their investors. In this process there was a certain time frame, when they repay their investor (Oliveira and Valls Pereira, 2018). If any disaster happens or if the company runs their business in loss, then they also are liable to pay interest to their investor.
Most appropriate method for SYNERGY POWER LTD
After discussing the capital raising method, it will suggest they take a self-funding method. Because there is no tension about the interest payment or any other issue. From the calculation it will see that this company runs their business at a loss. For the capital raising, if they take a loan from the bank or any other financial institution then they will be responsible to pay the interest back to their investor.
Hence, the company runs their business in a loss, they will adopt the self-funding for their capital rising (Posnaya et al. 2019). This process may be risky, but they will not be liable to pay back to the investor on time.
Part C
NPV calculation of original proposal (SYNERGY POWER LTD)
| NPV | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | ||
| New computer hardware | -60,00,000 | |||||||
| Manufacturing assets | -2,50,00,000 | |||||||
| Net profit contribution from sales | 15,00,000 | 15,00,000 | 15,00,000 | 15,00,000 | ||||
| Salaries saved | 60,00,000 | 60,00,000 | 60,00,000 | 60,00,000 | 60,00,000 | |||
| Training | -3,00,000 | -3,00,000 | -2,25,000 | -2,25,000 | -2,25,000 | |||
| Redundancy | -30,00,000 | |||||||
| New staff | -8,00,000 | -12,00,000 | -16,00,000 | -16,00,000 | -16,00,000 | |||
| Software | -7,00,000 | -7,00,000 | -7,00,000 | -7,00,000 | -7,00,000 | |||
| Waste/Energy | -30,000 | -30,000 | -30,000 | -30,000 | -30,000 | IRR | ||
| Net cash Flow | -3,10,00,000 | 11,70,000 | 52,70,000 | 49,45,000 | 49,45,000 | 49,45,000 | -0.1042 | |
| NPV | ||||||||
| 1+r | (1+r)^1 | (1+r)^2 | (1+r)^3 | (1+r)^4 | (1+r)^5 | 1,56,73,117 | ||
| 1.000 | 1.098 | 1.206 | 1.324 | 1.453 | 1.596 | -1,53,26,883 | ||
Table 13: NPV of original company (Source: Given)
NPV indicates the “net present value” of the SYNERGY POWER LTD company. NPV is very necessary for the investment option. As it is said that, if the value of NPV is >1 then it is the right time to invest in the company but if the NPV value is < 0 then the investment is risky. In this scenario it is seen the NPV of the company is negative, which is -15326883. According to the rule if the NPV >0 then the investment will not be risky.
In this scenario the NPV is negative for that reason this company does not benefit from the investment (Tshivhase and Booyens, 2020). And for their capital rising, it will suggest to them earlier that they should take the self-funding process rather than borrow capital from outside. And for their negative NPV no investor will not show interest in investment. Because of the negative NPV the investor will not get the desired return against their investment and the investment is also risky because the SYNERGY POWER LTD run their business in loss.
NPV calculation for new proposal (Solid state)
| NPV | Y0 | Y1 | Y2 | Y3 | Y4 | Y5 | ||
| New computer hardware | -40,00,000 | |||||||
| Manufacturing assets | -2,00,00,000 | |||||||
| Net profit contribution from sales | 15,00,000 | 15,00,000 | 15,00,000 | 15,00,000 | ||||
| Salaries saved | 60,00,000 | 60,00,000 | 60,00,000 | 60,00,000 | 60,00,000 | |||
| Training | -2,00,000 | -2,00,000 | -1,50,000 | -1,50,000 | -1,50,000 | |||
| Redundancy | -23,62,500 | |||||||
| New staff | -6,00,000 | -10,00,000 | -14,00,000 | -14,00,000 | -14,00,000 | |||
| Software | -7,00,000 | -7,00,000 | -7,00,000 | -7,00,000 | -7,00,000 | |||
| Waste/Energy | -30,000 | -30,000 | -30,000 | -30,000 | -30,000 | IRR | ||
| Net cash Flow | -2,40,00,000 | 21,07,500 | 55,70,000 | 52,20,000 | 52,20,000 | 52,20,000 | -0.0086 | |
| NPV | ||||||||
| 1+r | (1+r)^1 | (1+r)^2 | (1+r)^3 | (1+r)^4 | (1+r)^5 | 1,73,45,037 | ||
| 1.000 | 1.098 | 1.206 | 1.324 | 1.453 | 1.596 | -66,54,963 | ||
Table 14: NPV of proxy company (Source: Given)
NPV indicates the “net present value” of the company. It is very necessary for the investment option. It is said that if the value of NPV is >1 then it is the right time to invest in the company but if the NPV value is < 0 then the investment is risky. In this scenario it is seen the NPV of the company is positive, which is 17345037. In this manufacturing company they decrease their staff’s payment and that is why their production level also decreases and the NPV value is positive. According to the rule if the NPV >0 then the investment will not be risky.
In this scenario the NPV is positive for that reason this company gets benefited from the investment and increases the capital of the company and creates a better valuation of their company (Wang et al. 2020). And it is seen earlier that this Solid-state company runs their business in profit and their performance is better than the SYNERGY POWER LTD. For that reason, it is said that it is the right time to invest in the company because there is a low risk factor in the investment and the investor will get a satisfactory result from their investment.
Conclusion
In this context from the whole calculation, it is concluded that the proxy company that is Solid state performs better than the original company. The ratio of this company is high from the previous year and for that reason this will give a satisfactory result to the investor for their investment. On the other hand, the CAPM and DVM model helps to calculate and identify the risk and the return on the investment and give the investor a clear-cut idea about their investment.
And the capital raising process helps them to decide what capital raising process they should adopt. And the NPV helps to assess the company’s position in the market and this also helps the investor to make decisions about their further investment.
Reference list
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I don’t think the title of your article matches the content lol. Just kidding, mainly because I had some doubts after reading the article.