While the long-term finance is repaid over a course of the period which includes bank loans, debentures and retained profits, the short-term finance appeals more as it comes with no additional penalty charge for early payment, unlike the long-term finance. Feasibility: If interest rates are high but are forecasted to become lower in the future, the company may choose a short-term source of funding to delay a commitment to long-term sources until a future debt arises (Acadoceo,
Liquidity also measures how easy it is for a company to raise cash or convert assets to cash in a short period. Commonly used liquidity ratios are: 2.2.1 Current Ratio According to (Averkamp, 2004), “current ratio is the liquidity and efficiency that measures a firm's ability to pay off its short-term liabilities with its current assets. The current ratio is an important measure of liquidity because short-term liabilities are due within the next year”. This means company has a limited time for money collection to pay off these liabilities. Current assets like marketable securities and cash equivalents can be converted into cash easily and in a short period of time.
As a result of the time value of the money, NPV considers the compounding of the discount rate over the span of the project. The NPV of a project mirrors how much cash inflow or outflow and it measures up to or surpasses the amount of project capital required to reserve it. An organization utilize NPV as a method for contrasting their relative profitability with assurance that exclusive the most lucrative endeavors are sought while evaluating numerous projects. A higher NPV shows that the project is more fruitful. The forecasted cash outflow and inflow for every period must be recognized and additionally the expected discount rate in order to compute NPV.
DIVIDEND GROWTH MODEL Valuation of a business consists of various processes that require a deep understanding of a business such as, forecasting performance, selection of an appropriate valuation model, which will in turn help to determine whether or not to purchase. THE CONSTANT DIVIDEND GROWTH MODEL This is also referred to as the Gordon Dividend Growth Model. Which fall in a class of models referred to as Dividend Discount Models (DDM). It is taken that the value of stock today is the present value of all future cash flows on that stock. Hence determining the price (intrinsic value) of stock is based on the discounted value of future cash flows.
The authour uses this illiquidity measure to regress cross-section of individual stock returns on their prior-year illiquidity measures. The results demonstrate that illiquidity has a positive impact on stock returns. As shown by Florackis et al. (2011), has several apparent advantages. First, the ratio per se is very intuitive hosting the idea that the stronger the response of returns, the less liquid is the stock.
Dividend growth model and P/E ratio are applicable to company that is listed in stock exchange whereas the free cash flow is usable for all type of company. Free cash flow model is more realistic way to estimate the business valuation compared to the other two as it take into account the real cash flow from future year discounted as cost of capital. Free cash flow is the only model that use discounted cash flow which is consistent with the concept of time value of money. Q3. Accrual accounting Accrual accounting is an accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur.
They have a large effect on profit, but there are many suppliers and possible substitutes so they are easily available. Leverage products should be bought at volume when the price is low. Improving knowledge of the markets, continually sourcing new products and suppliers, and target pricing and optimising order quantities are recommended for these items. Competitive bidding can also be applied, which targets short term contracts with suppliers. Based on the information given in the case study and Kraljic Portfolio Purchasing Model, archival storage services would be classified as a routine item since has low profit impact and low supply risk, and the marketing paper would be classified as a leverage item because it has high profit impact with low supply risk.
Investment in property, buildings and major equipment are called capital expenditure. Such capital expenditure budgets allow management to forecast capital requirements, to on top of important capital projects, and to ensure the adequate cash is available to meet these expenditures as they come due. The balance sheet budget The balance sheet budget plans the amount of assets and liabilities for the end of the time period under considerations. A balance sheet budget is also known as a pro forma (projected) balance sheet. Analysis of the balance sheet budget may suggest problems or opportunities that will require managers to alter some of the other
Capital structure is a structure consist of various fund sources that is used in a firm. The structure is made out of debt and equity. Those two funds are more to long term and permanent compare to debt and equity in a financial structure. The long term funds are used to finance the firm’s assets which contributes to the firm’s operation and growth. A carefully build capital structure will contributes to a good market value.
The ratio refers to the amount of total net income of a company relative to the dividends paid to shareholders. The dividend payout ratio for Nestlé Company as shown in Graph is quite stable. Nestlé Company is paying a constant percentage of net income in the form of dividend to their shareholders each year under constant dividend payout ratio policy. As the percentage of earnings paid out each year is fixed, it implies that the dividend payout ratio will become more stable. Since the dividend payout ratio in Nestlé Company is over 100 percent, it can be said that Nestlé Company pay more money to its shareholders rather than keep the earnings for other financing purpose.