Managing Financial Resources and Decisions

 
Research Design and Analyses for Psychology Quantitative Coursework Assignment
Managing Financial Resources and Decisions
Task 2: Alpha Plc
For any company the cost of sources of finance have significant implications on the choice of a
particular source of finance or a combination of more than one source. The choice affects the
overall cash flows of the company and ultimately affects the profitability of the company (Drury,
2008). Considering the case of Alpha Plc. Finance director has recommended two sources of
fiancé. First is a five year £ 12 million floating rate term loan from a clearing bank, at an initial
interest rate of 10% and the second is rights issue at a discount of 15% on the current market
price. The company’s current share price is 180 pence. Each of these sources has different costs
and implications on the company. For example the cost of the loan for the company is the same
as its interest rate which is 10% initially and is expected to change subject to conditions in the
agreement. This means that at the end of first year Alpha Plc. is expected to incur an interest
expense amount of £ 1, 200, 000 which can be paid out of the expected profit before tax of £ 9,
680, 000 (25% increase in previous Profit before interest and taxation) without lowering the
liquidity of the company.
On the other hand if Alpha Plc. chooses to issue rights issue the company will have to float
7843137 shares @ 153 pence per share. Assuming that the investors expects the same return of
25 pence per share (although investors are likely to have expectation of higher returns);
ultimately the company will have to have sufficient profit after interest and taxation to meet the
expectations. However, the calculations below show that the company will not have sufficient
profit after interest and taxation to pay dividend amount. 
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Research Design and Analyses for Psychology Quantitative Coursework Assignment
£
Share Price 1.8
Rights Price @ 15% discount 1.53
Number of Shares to be issued 7843137
Amount to be paid keeping the same dividend @ 25 pence
per share
1960784
Income Available for ordinary shares after 1 year £ 000
Expected Profit before interest and Taxation 9680
Interest Expense 1448
Profit after Interest 8232
taxation @ 25% 2058
Income Available for ordinary shares 6174
Thus pursuing the loan option is viable and profitable for Alpha Plc.
Information Needs of Decision Makers
The primary decision maker is the entrepreneur and thus the information needs of entrepreneurs
are highest priority. The entrepreneur attempts to operate business with high profitability and
uses a number of financial planning tools (explained in next section) to monitor the business
health to maintain profitability and achieve sustainable growth. Another decision maker category
comprising of investors also need information to decide whether to invest in a business and how
much to inves. Their aim is to maximize their wealth therefore they also monitor the health of the
business. Among others another significant group requiring information is the law enforcement
agencies and tax authorities that need financial information to conduct their duties and ensure
that business transactions and activities conducted are legal, ethical, and beneficial for the
society as a whole (Brigham and Ehrhardt, 2013).
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Research Design and Analyses for Psychology Quantitative Coursework Assignment
Financial Planning Tools
There are a number of financial planning tools used by various decision maker groups as
mentioned in previous section. For example entrepreneurs use budgets to manage cash flows,
investors use financial statements prepared by accountants to make their decisions, and
government authorities conduct audits to gain information they need. All these are financial
planning tools that are used by different groups of decision makers with different information
needs as well as different interests in business activities. One of the most commonly used
financial planning tool is the ratio analysis based on the financial information provided in the
financial statements (Brigham and Daves, 2012). This tool offers a number of ratios that reflect
profitability, liquidity, operational efficiency of a business during a financial period. Ratios for
different periods of same company and ratios of different companies for the same period are
usually computed to make comparison of the performance of a company. Based upon the
evaluations derived from such tools decision makers formulate strategies for financial planning
to achieve their individual aims and objectives and maintain interests regarding the business
(Brigham and Ehrhardt, 2013).
Impact of Sources of Finance on Financial Statements
Sources of finance not only affect the profitability of the business but they also have impacts on
various aspects of business most prominently the liquidity of the business. Similarly the options
mentioned abov