Methods of Investment Appraisal and Financial Statement Analysis

Methods of Investment Appraisal and pecuniary Statement AnalysisThe purpose of this report is to assess variant method of investment appraisal and financial pedagogy analysis and and finaly recommendation on choosing stratefic portfolio.Task 1ForcastingThere argon various to forecast from the then(prenominal) result and find out what is going to happen futureThe simplest method for forcasting revenue and follow through time series analysis with simple go average for exampleUsing moving average the forcast for next months will be Forcast jan+feb..to dec divided by 12 months and answer is for July the forcast would be 31.58 or 32 and so on.Trend is sys terminal figureatic (gradual) increase or decrease in average over time bit seasonal forcasting is the predictable short term cycling behaviour for whatever reason day month week etcFor example assume the following market sh argon of tesco in the next stratumSeasonal FactorAverage Seasonal elementMonth2007200620072006Jan3130.61 .021.021.02Feb3230.40.991.031.01Mar3530.60.911.020.96Apr33310.961.010.98May3131.41.020.991.01Jun2931.51.100.991.04Jul3031.61.060.991.02Aug31.431.41.010.991.00Sep33.131.20.961.000.98Oct32.231.40.990.990.99Nov32.3431.40.980.990.99Dec31.131.41.020.991.01Average31.7631.16Now if we want to find market function of tesco in January of 2008January forcast = Average forcast multiply by seasonal particularor which is 1.02If average mothly forcast for the year is 30 then forcast for January will be 30*1.02 =30.6Task 1 part 2Its precise know and understandable fact that exit a new seam or growing it require a lot of hard work ,planning and right kind of financing with a ag sort out of dedicated peoples.There ar all source of finance which can be employ to finance but each of them has some usefulness or edge over in some way or other.Therefore deciding which source of financing should we use is a lots stand work together ability to face losss coming up and ability to take decisions.Mo ney (Capital) is life blood of any business and business cannot extend without capital.Keeping plan flexibleThinking big and move fastBusiness should move on when raising capitalStrong management teamWhat amount capital required depended what we want to achieve and our experience e and credit worthiness and stage of growth at which we stand together ecumenic factor such market trends and economic condition.There are various sources of finance depend on business1) Self financial backingSelf FinancingFinancing through credit card and is the close to riskiest option and costly as interest rate on credit cards are very high and amount available is normally low subject credit evaluation conducted by bank.Start up Financing is another method whereby a business can put cash into the new business generated through various different source till it is reach to level to generate and financing itself.2) Commercial Financing by BankBusiness can get commercial financing if they constitute track record or they deal something to give as security to bank.Commercial financing is very important and fundamental way to finance a specific purport and normally bank will agree to finance if in that location is home work done with regards to feasibility.The injustice is party has to bear risk of loss and bank will vote out interest which is great costThough these are disadvantages still commercial finance through bank about widely use to finance a specific project.3) Share IssueA newly establish company can issue Initial humankind offering to face lifting finance from public but a lot of home work require. Private Companies can issue new shares in the form rights issue or bonus issue but cant advertise them.Initially company can finance itself equity investment by investors. Later on merger or encyclopaedism of limited company is very near(a) source raising finance by issuing shares.Share issue is quite unusual way to raise money for specific project its time consum ing and lengthy process but its one the less riskiest way.5) Finding Investor/PartnerFinding a person, group or organization to fund business is another form of financing to raising capital .the advantage if this method is risk is shared between partners and disadvantage is worth generates from business is divided between one more than than peoples according partnership agreement.There are many an(prenominal) other sources of finance for small business like local government initiatives on lending program and commercial companies providing finance etc.Some big companies are very cash full and on that pointfore they look opportunities to invest cash and therefore they can act as strategic investors.Task 2There are vaious method appraise financial returns on various competing project. The most important of them are1) Payback distributor point2) meshwork present value1 Pay back period permits take a example if there are two projects where initial investment is 60m while one giv e return as following course of instruction Amount1 102 253 304 28While another project give returns as form Amount1 132 203 254 50Solution spue OneYear Amount be Investment0 601 10 502 25 253 30 25 4 28 vomit TwoYear Amount Remaining Investment0 601 13 472 20 273 25 24 50 2 iniital investment returneThe first project here pay its entire investment in three years while the second projecgt pay its entire investment four year time so according payback period method project two should be selected.Payback period doesnt account for time value of money therefore not very effective method2. Net Present Value victorious the same example above if we analyse them (we need discount factor which cost of capital to discount future cash flows. Lets assume it as 10%Year Amount Discount Factor Present Vaue01 10 0.909 9.092 25 0.826 20.653 30 0.751 22.53.4 28 0.683 19.12471.394Project TwoYear Amount Remaining Investment Present Vaue0 11 13 0.909 11.8172 20 0.826 16.523 25 0.751 18.7754 50 0.683 34. 1581.262The Net present value of second project is more than first one therefore e according to npv method second project is more geltable.Select appropriate and relevant financial tuition for use in the process of making strategic decisions on investmentThere are vaious ways to analyse investment each has it own merit and demerit but mostly to analyse investment we required some basic information to submit our decision on.If we are comparing two or more competing projects we can do by using investment appraisal techniques like wampum present value etcWe need some basis information to calculate and appraise and finally take investment decision whichApproximate amount of union investment required for the projectThe future cash flow whether inflow or outflow that can be generated from the project.The minimum required return .If we are going to invest in a company we need to focus on two main factor which are how much dividend it pays through ratios called dividend persist in and dividend yield and how much capital gain we can get by movement in share price relevant ratios are price earning ratio, earning per share etc.For the above calculation we need exact amount ofDividend paid during the yearShare priceProfit after measureNumber of run-of-the-mill share issuedThis information can be drawn from the financial statement of targeted company.The future investment can be ground on basis of past times performance of selected companiesThe investment in company to acquire needs other consideration which is base on various financial as well as non financial factors but mostly following factors are taken into account .Company financial health through calculation of various ratio profitability, pitch , liquidity and efficiency etcThe vision, mission , goals and objectives of the acquiring company and strategies to achieve those and many more. Therefore decision regarding acquisition or mergers required comprehensive analysis.Make recommendations based on a pos t- visit appraisal on the appropriateness of selected investment project decisionsThe payback period is simplest method to decide between competing project which one is the scoop out but it ignore time value of moneyNet present value account for time value of money and is one of the mostly used way to appraise competing projects but it is complex and and require some figures to give correct answer like discount rate etcFor investment in the shares of company we need financial information such as share price dividend eps etc but selection of company to invest in its share depends on many other factors like if the investment entity want to invest for long term or short termFor long term investements share price flash is more important than dividend or vice versa.Task 3Financial StatementsAnalyse financial statements using relevant techniques to assess the financial viability of an Tesco for 2008The financial statement of any organization can be analysed by calculation of ratio and each ratio has its own significance and importance. There is hard and fast overtop and no parameters to judge performance of each and every company against but its very subjective and depend on company and industry in which it operates.Let assume the following financial statement belong to company called Simon Sparks and analyse its financial statement.Simon SparksProfit and Losss Accountthe period ended 30June 200X gross sales292,000.00Less Sales returns13,800.00Net Sales278,200.00Carriage outwards15,000.00263,200.00Less cost of good soldSOpening stock15,100.00Purchases135,600.00Less Purchase returns 5,200.00130,400.00Less termination Stock16,200.00129,300.00Gross Profit133,900.00Bad debts2,200.00Advertising6,000.00Electricity Gas11,100.00Salaries and wages37,200.00Insurance5,700.00 beat back expenses.16,600.00Postage stationery2,400.00Rent rates20,900.00102,100.00Net Profit31,800.00Less Drawings15,800.00Retained ProfitBalance Sheet as at 30 Juneas of 30 June 200XNon Current A sset( . Fixtures Fittings cost60,300.00Motor vehicle cost42,000.00 thoroughgoing Non Current Asset102,300.00Current AssetCash600.00Trade debtors24,000.00Closing stock16,200.00Total Current Asset40,800.00Total Asset143,100.00Liabilities and Owners EquityCapital83,800.00Retained Profit16,799.00100,599.00Non Current LiabilitiesCurrent LiabilitiesBank Overdraft5,600.00Trade Creditors36,901.00Total liabilities plus capital143,100126,699.00All businesses exist to make profit in some way or other and to measure profitablilty we have many ratio to analyse same data from different aspects. Retuen on capital employeed is a primary ratio to assess profitablitly of any orgnization and its one of most widly used ratio.It is calculated byDividing Profit before interest and tax with capital plus long term liability In the case of Simon spark it is 32% which can be assume as very good performance interims of profitability but ratio cant be analyses in standalone way they must be compared with so me industry average competitor or past performance to evaluate and we dont ant information available here.Simon Park has managed to generate gross sale of 292,000 which is really commendable as long as data is reliable and comparable. The Gross profit ratio shows companys profit margin when selling price is compared with cost of sale. The GP ratio of Simon spark is 51% which is really commendable and appreciatable but remember we are assuming that data is not only reliable but trustable.The other factor to measure profitability is nett profit 6% here we see how effectively and efficiently day to day operation are run by management.Surprisingly the net profit margin is just 6% it is definably not very good indication of good performance but due to limitation of information for comparison we are unable to give conclusive remarks but 6% is very low and it shows though company is earning earnings but its not working efficiently and effectively.The most significant expenses are salarie s and wages followed by rent and rates. We dont know if its inefficient management but definitely I think there is equal manner for improvementLiquidityLiquidity ratios are very important as company can be profitable but if not liquid rich can run to insolvency or at least find it self in big problems.Liquid assets are those which can easily convert in to cash with in short duration of time. The examples are cash, debtor, stock etc.The most important of liquidity ratio is current ratio which shows current assets as number of times to current liabilities and it is very widely used in business world.There is no specific ratio which can be express as good enough or bad as it varies from industry to industry and company to company.Simon Sparks current ratio is 1.5 times it mean it has 50% more liquid asset to meet it immediate needs. Its not bad but considering limitation of information we can assume its up to standard of industry.But there is more important ratio coming out of curr ent ratio it is quick ratio. In quick ratio we dont consider stock as apace convertible into cash asset and therefore remove it.The quick ratio of simpn spark is 0.94 times which cant be said either good enough or bad for the reason mention above.Carry out a performance audit of an organisation including reference to internal and external factorsPerformance audit is audit of mainly(management operations ,function or procedures of) not for profit or governmental organization to ensure value for money (economy efficiency and effectiveness ) in use of goods and services of resource by using systematic professionally designed and conduct methodologies which are generally accepted and well structured.Few benefits of performance audit is astir(p) organisational performanceA tool to increase efficiencyPolicy and performanceLegal imperativePerformance audit may include detection of imposture and error but its not included everytime there fore scope of permance audit must define and given in writing prior to start of workPerformance audit using internal factors might be for example in production it may number of units produce in a one hour compare with standared or ideal performanceFor financial performance profit can be compare from period to another with cost of sale and revenue to ensure resource are used properly and generate value for moneyExternal factors to consider for performance audit are comparision of per unit cost with major competitor to ensure VFM (value for money economy, efficiency and effectiveness is achieved .Comparision of number of staff with equivalent or similar company or employee productivity with similar organizationPerformance audit is not define in any standered and can include anything but it is different from performance measurement. function appropriate calculations to improve the quality of financial information usedThe quality of information is very important because its not reliable and relevant than its useless most business try t o spend thousand to avoid the lost of money but unfortunately lack of focus on right cause more loss.The reliable and timely financial information is essential for success and to avoid loss and making wrong decision on the basis of misleading information.Financial in itself is very vast and full of useful information but its generall and everyone has to take this information and use it assess their own purpose for example a company can generate huge profits sayCompany A has revenue of 100 million while gross profit is 50 million and net profit 25 million.A lay men can conclude fromthis information that companys is performing really well and generating good profits but what if we got data the competitor of same size earn profit 1000 m with Gross profit ratio of 70% unlike our 50%.Even worse can happen like company is generating huge profits but its running out of cash to pay its immediate liabilities . Creditors have right to appeal in court and prove company as defaulter and therefo re cease its existence.So calculation of various ratio from the wide-cut set of financial statement help in understanding actual position of company regarding its competitors.IMake recommendations on the strategic portfolio of an organisation based on the interpretation of financial and ancillary informationThe world is moving very fast and there is increasing competition with increasing globalization and initiative of borders therefore organization need to update themselves with latest information and predict future and install for itOrganizations have many reason to believe that they have to prepare themselves before the storm and therefore they are required to identify, find and use the required information whether financial or other to prepare themselves for the future.There are various strategies an organization can follow to achieve its objectives. A company should diversify if they have access to adequate resource (financial or other)and technical potentiality to achieve success.Diversification bring competitive advantages as with mergers as economies of scale and information asymmetry can achieved .Strategic portfolio may include deviseing and investing in new technologies to achieve competitive advantage as technology as key to success.The factor which can be consider for strategic portfolio is to develop new products and or improve exsiting one to compensate those products whose lifecycle is about to finish .Partnership with international companies or local companies to enter new ventures is also a great option and by doing this organization can not diversify but loss in case of failure is share between partners and there will be access to new and usesful information by working with another organization.These are the few reformation which an organization should consider to develop there strategic portfolio and its quite subjective and can vary from one organization to another.30.630.430.63131.431.531.631.431.231.431.431.4