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Issuing common stock helps a corporation raise money. ... Companies must decide,
however, whether issuing common stock is really worth it. Issuing additional shares into the
financial markets dilutes the holdings of existing shareholders and reduces their ownership
in the corporation.
answer. I don’t agree with the funding model.
Existing shareholders' ownership is diluted when new shares enter the market. One
of the benefits of being a majority shareholder is the ability to vote on major
corporate decisions. An existing shareholder's equity stake and voting power
declines as a larger number of common shares are sold in the market.
Obtaining Venture Capital is one of the methods I would recommend. Venture
capital funds are professionally managed funds that invest in high-potential
businesses (The Hartford, 2021). Obtaining venture capital financing can give the
organization with a vital source of expertise and counsel in addition to the financial
backing. This can aid in a range of corporate decisions, such as financial and human
resource management.
Reference:
The Hartford. 2021. Advantages vs. Disadvantages of Venture Capital. [Online].
Available at: https://www.thehartford.com/business-insurance/strategy/businessfinancing/venture-capital. [Date Accessed: 10.10.2021].
Issuing common shares in the financial markets is an alternative to issuing debt.
Rather than adding more debt to a company's balance sheet, which is a financial
statement, and budgeting for the servicing of debt, a company can take a less
expensive route and issue common stock. With stock, an organization does not need
to make obligatory interest payments to investors and instead can make
discretionary dividend payments when it has extra cash.
I would strongly recommend that the business considers obtaining a business loan,
seeing their current long-term debt is R 50 000, in relation to their retained
earnings. There are various advantages to debt finance. To begin with, the lender
has no authority over your company. When you repay the debt, your connection
with the lender is over. Then there's the fact that the interest you pay is tax
deductible. Finally, because loan payments do not fluctuate, it is simple to anticipate
expenses.
According to Milpark (2021) debt is a cheaper form of financing than equity financing
but comes with added risk.
Reference:
Milpark Education, 2018. Management Accounting and Finance (Part 2). Cape Town:
Milpark Education.
I do not entirely agree with the statement.
Whilst debt financing can be beneficial for the business, in a sense that they do not
loose ownership of the company and there is a set time at which their debt will come
to an end, at a cost (interest). The company also needs to consider if they qualify for
the loan amount they need for expansion.
Equity financing is risk (Milpark, 2021) as this entails losing a portion of your
business to external people, who may not enough have intertest in the business, but
have the funds. Investors want profitability and stake.
I would thus recommend that the business uses both a combination of debt and
equity financing. For example, it may sell a portion of its shares and obtain a loan
with reasonable interest rates.
That way the business doesn’t spend years trying to repay the loan and doesn’t lose
a big portion of ownership to investors.
Reference:
Milpark Education, 2018. Management Accounting and Finance (Part 2). Cape Town:
Milpark Education.
CFI (2021) describes the time value of money as a basic financial concept that holds
that money in the present is worth more than the same sum of money to be
received in the future.
It is thus incorrect to assume that after 30 years the project will still be worth R2.6
billion. Simply because with 2.6 billion today can achieve more or has more buying
power than it will have in the near future.
One needs to consider elements such as inflation, material costs, labour etc, for
example a litre of water today can not be purchased as with the same amount in the
future.
Reference:
CFI. 2021. Time Value of Money. Money in the present is worth more than the same
sum of money to be received in the future. [Online]. Available at:
https://corporatefinanceinstitute.com/resources/knowledge/valuation/time-value-ofmoney/. [Date Accessed: 11.10.2021].
Dear Colleague
Indeed (2021) suggests that the concept of the time value of money (TVM) states
that the money you currently have is more valuable than that same amount in the
future.
The time value of money is also related to the concepts of inflation and purchasing
power. Inflation causes prices to increase over time, which means that the money
you currently have can buy more goods now than you can in the future.
What you can achieve with R 2.6 billion today, cannot be achieved with R 2.6 billion
Rands in 30 years. Inflation creates a significant reduction in buying power.
Time Value of Money also represents an opportunity forgone. For example, R 2.6
Billion can generate more interest in stock markets, instead of 10% annual interest
from investments.
In conclusion, I disagree with the statement.
Reference
Indeed. 2021. Time Value of Money: Definition, Formula and Examples. [Online].
Available from: https://www.indeed.com/career-advice/career-development/timevalue-of-money-example. [Date Accessed: 11.10.2021].
Question 1: Restructuring of debt
South Africa’s largest clothing retailer, Edcon, has finalised the restructuring of its
debt, resulting in the reduction of the debt from R26.7 billion to about R7 billion.
The company on said development would enable it to shift its focus from debt
reduction strategies to improving the operational performance of the ailing retailer.
The owner of Edgars, Jet and CNA said it had obtained all the necessary approvals
for the restructuring with lenders, who include various banks and investment firms,
having already approved the move.
Edcon chief executive Bernie Brookes said: “The repairing of the group’s debt
position has been a monumental initiative that has taken many, many hours of work
to ensure its eventual success.”
Source: http://www.iol.co.za/business-report/companies/edcon-debt-is-reduced-tor7bn-7591373
In your view, do you believe that reducing the debt structure of the organisation will
improve the company’s performance? Motivate your view.
Nwude, Okpara, Itiri, Bamidele and Sergius (2016) citing (Majundar and Chhibber,
1999) attribute high cost of borrowing (rate of interest) to negative and significant
relationship between capital structure and firm performance.
The authors further suggest that highly levered firms are considerably less profitable
than firms with a greater level of equity in their debt structure.
In my view, I believe that reducing the debt structure of the organisation will
improve its performance. This mainly because high leverage at times weakens the
incentive to pursue efficiency, since borrowers, relative stake in the firm is small.
This is consistent with the observation of Khan (2012) that financial leverage has a
significantly negative relationship with the firm performance.
Reference:
Nwude, E. & Okpara, Itiri & Agbadua, Bamidele & Udeh, Sergius. (2016). The Impact
of Debt Structure on Firm Performance: Empirical Evidence from Nigerian Quoted
Firms. Asian Economic and Financial Review. 6. 647-660.
Attract Capital (n.d) suggests that the term debt structure refers to the duration and
timing of principal and interest payments. The structure typically refers to
characteristics such as the maturity dates, the principal repayment terms, and the
provisions for prepaying the loan.
Whilst financing the organisation with debt is common, which emulates from
available financing, however knowing how much debt the organisation can handle is
also imperative. In another notion, there are highly leveraged companies, are
performing extremely well.
Whilst reducing the debt structure can assist to improve the organisation’s
performance, it is not guaranteed.
However, restructuring debt structure shields the organisation, particularly is the
industry in which is operates especially when it suffers from economic downturns.
Reference:
Attracted Capital. No date. Debt Structure. [Online]. Available from:
https://www.attractcapital.com/debt-structure.html. [Date Accessed: 22.10.2021].
Question 2: Relevancy of cash budgets
A cash budget (or forecast) is a detailed budget of estimated cash inflows and
outflows incorporating both revenue and capital items. (Source: CIMA, Strategic
Paper F3, Financial Strategy 2017). In most cases, the actual amounts are always
not in line with the budgeted amounts, due to variances.
In your opinion, do you believe that budgets can still contribute towards better
financial management, even though it is anticipated that there will be variances?
According to Banks (2018), it's easy to get caught up in day-to-day issues and lose
sight of the greater vision when running a firm. Successful firms set aside time to
generate and manage budgets, draft, and review business plans, and track their
financial condition and performance on a regular basis.
Budgets, in my opinion, can help with better financial management. Businesses can
compare results to expenditures and ensure that resources are available for projects
that support business growth and development by referring to the budget. It allows
the business owner to focus on cash flow, cost reduction, profit improvement, and
return on investment.
In conclusion, budgeting is the foundation for all business success. It aids in the
planning and management of the company's finances. Planning is futile if there is no
control over spending and if there is no planning there are no business objectives to
achieve.
Reference:
Banks, K. 2018. The Importance of Budgeting in Business. [Online]. Available from:
https://wlf.com.au/importance-budgeting-business/. [Date Accessed: 23.10.2021].
2.
According to Chron (2021), budgeting assists firms in forecasting income and
expenses as well as spotting potential cash flow concerns. A budget is a
performance road plan that gives precise information about projected outcomes that
may be used by a proactive management to guide actions toward desired outcomes.
Budgeting can help you manage your money better in the following ways:
•
•
•
•
Assisting in the financial management of a firm
Ensuring that the business can meet its obligations
Assisting business owners in meeting their objectives
Assisting business owners in funding future initiatives
In conclusion, for better financial management, a budget should be revised regularly
or quarterly to assist businesses in spotting potential opportunities and problems
and responding to them quickly.
Reference:
Chron. 2021. How Does a Budget Help a Manager With Financial Control? [Online].
Available from: https://smallbusiness.chron.com/budget-manager-financial-control43483.html. [Date Accessed: 23.10.2021].
3.
Carlson (2021) infers that a budget provides crucial information for staying within
your means, dealing with unanticipated problems, and generating a profit. A good
budget will identify available capital, project expenses, and forecast revenue.
Business leaders must constantly refer to their budget in order to compare predicted
budget figures to actual budgetary performance and determine where modifications
should be made.
Budgets motivate managers to achieve budget goals, they also provide visibility to
the company’s performance, helping in identifying areas, where the business is
bleeding financial, enabling the business to take sound decisions to improve,
arguably they serve as an early detection, mechanism and they can help solve
problems before they mushroom, which significantly contribute to financial
performance.
Last but not least, budgets help by reducing risks.
In conclusion, budgets can help contribute to better financial management, not just
for businesses but individuals too. The moment an individual buys something out of
their budget, it negatively affects their financial management.
Reference:
Carlson, R. 2021. Why Business Budget Planning Is So Important. [Online].
Available from: https://www.thebalancesmb.com/business-budget-planningreasons-393029. [Date Accessed: 23.10.2021].
Question 1: Performance measurement
A Life-For-All (Pty) Ltd is an insurance company offering life policies to the public at
large. The company’s CEO, has recently resigned, due to the company’s nonperformance in various areas. A significant number of clients have terminated their
insurance policies with Life-For-All (Pty) Ltd, due to poor service. As a result,
revenue is continuing to decline. Some of the senior key employees are planning to
resign.
Do you think balanced scorecard measurement can be used to resolve this crisis at
Life-For-All (Pty)?
Havard Business Review (n.d) citing (Kaplan and Norton, 1992) suggests that senior
executives do not rely on one set of measures to the exclusion of the other simply
because that no single measure that can provide a clear performance target or focus
attention on the critical areas of the business. Managers want a balanced
presentation of both financial and operational measures.
I believe that the balanced scorecard measurement can be used to resolve the crisis
at Life-For-All (Pty).
The Balanced Scorecard Links Performance Measures
1. How do customers see us? (customer perspective) – once you can observe the
customer’s perception of the organisation, you will have a clear indication if they are
happy with your service or not.
2. What must we excel at? (internal perspective)- This helps to do an analysis on
activities or functions that add no value to the business, once they can be improved,
this may improve efficiencies and lead to customer satisfaction.
3. Can we continue to improve and create value? (innovation and learning
perspective)- this perspective drives organisations to find innovative ways of doing
things, for example process improvement, customer communication etc.
4. How do we look to shareholders? (financial perspective)- lastly this looks at how
we are perceived by shareholders. If the company’s financial performance is poor,
shareholders are not happy.
In conclusion, although the company’s financial performance may be crippled, the
balanced scorecard allows managers to look at the business from four important
perspectives, not just one or two.
Reference:
Harvard Business Review. No date. The Balanced Scorecard—Measures that Drive
Performance. [Online]. Available from: https://hbr.org/1992/01/the-balancedscorecard-measures-that-drive-performance-2. [Date Accessed: 04.11.2021].
2.
Dear colleague, I fully agree with your statement. Another method that can be used
for decision making is the Payback Period.
The payback period, according to Hofstand (2013) is one of the most basic
investment appraisal approaches. The payback method specifies how long it will take
for a project to generate enough cash flow to cover its initial costs.
Payback has the virtue of being simple to compute and comprehend. It is simple to
understand even for those who do not have a financial background. However, it has
the drawback of ignoring the time worth of money and anything that occurs after a
payback point.
The attractiveness of an investment is proportional to its payback duration. Shorter
paybacks make investments more appealing. The payback period is used by
investors and managers to make swift decisions about their investments. The
payback time is a concept that is commonly used in financial and capital budgeting.
Although it is not a preferred strategy, it can be utilized for a high-level overview.
Reference
Hofstrand, D. 2013. Capital Budgeting Basics. [Online]. Available from:
https://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-240.pdf. [Date
Accessed: 07.11.2021].
Question 2: Decision-making on the project
Lion Limited plans to purchase a new machine that that will manufacture electrical
cables. The estimated useful life of the machine is 10 years. The financial manager
of Lion Limited is adamant that the net present value (NPV) of this machine is the
only measure that will determine whether or not the company can proceed with
purchase this machine.
Do you agree with this statement? Give reasons for your view.
No, I do not agree with the statement
According to The Motley Fool (2015), the net present value (NPV) approach can be a
very effective way to assess the profitability of a firm's investment or a new
initiative within a company. However, it is not the be-all and end-all solution in
finance; it has a few specific advantages and downsides that may make it unsuitable
for particular investment decisions.
Other tools available to Lion Limited include the Internal Rate of Return (IRR), which
analyses the profitability of possible investments using a percentage value rather
than a cash number. It ignores external considerations like capital expenses and
inflation.
To summarize, the NPV is not the only instrument that may be used to determine
whether or not a purchase should be undertaken. The NPV, on the other hand, will
provide more realistic statistics if the investment is large and predicted to grow over
time. The IRR can be utilized for a quick assessment if it's merely a high-level
calculation. It does, however, necessitate a lot of assumptions, leaving it vulnerable
to manipulation.
Reference
The Motley Fool. 2015. Advantages and Disadvantages of Net Present Value Method.
[Online]. Available from: https://www.nasdaq.com/articles/advantages-anddisadvantages-net-present-value-method-2015-11-14. [Date Accessed: 06.11.201].
2.
Investment decisions are critical for a business since they determine the
organization's future survival and growth. The primary goal of a business is to
maximise the wealth of its shareholders. As a result, a company must spend in any
undertaking that is worth more than its costs. The difference between the project's
worth and its costs is the Net Present Value.
The Average Rate of Return (ARR) can also be used to determine whether or not to
buy something, but it's crucial to remember that it's based on profits rather than
cash flows and overlooks the time value of money (Chron, 2020). As a result, it
should only be used to get a quick overview of a new project and should not be used
as the major technique of investment evaluation. The influence of cash flows and the
time value of money are critical factors to consider when making an investment
decision. Another shortcoming of the ARR is that it is reliant on the business's
depreciation policy.
To summarize, while ARR can be useful as a tool, the major drawback of adopting
the average accounting return technique is that it ignores the time value of money.
Reference:
Chron. 2020. The Pros & Cons of the Average Accounting Return Method. [Online].
Available from: https://smallbusiness.chron.com/pros-cons-average-accountingreturn-method-34428.html. [Date Accessed: 06.11.2021].
3.
Hi Danicka,
I share the same sentiments.
Balanced Score Cards can be used by business leaders to bring their organization's
strategy to life and track performance. The capacity to measure and remeasure over
time is critical for determining the success of efforts you're implementing to improve
business performance (Latter, 2018).
Unlike traditional ways of evaluating business performance, the BSC provides a
holistic perspective of your organization, allowing you to determine whether or not
your company is fulfilling its goals.
The balanced scorecard is a communication tool as well as a measurement
instrument. It can be used to teach your employees about the company's strategy
and how their individual performance affects the company's goals.
To conclude, having a balanced scorecard alone will not result in improvements.
Organizations may reliably assess and track performance and effectively convey it to
everyone by incorporating it into a larger plan and pairing it with pulse surveys. It
will drive performance across your critical areas and increase profitability if done
appropriately.
Reference:
Latter, T. 2018. How A Balanced Scorecard will drive your business performance.
[Online]. Available from: https://www.thehrdirector.com/features/health-andwellbeing/balanced-scorecards/. [Date Accessed: 07.11.2021].
Question 2: Ordinary share vs preference shares
The directors of the company should always concentrate on the ordinary
shareholders of the company and should also ensure that these receive dividends
first.
Do you agree with this statement? Give reasons for your view.
1. No, I partially disagree with the statement. The company's directors should focus
on ordinary shareholders, who have specific rights that preference shareholders do
not, such as voting rights. Ordinary shareholders have a say in the business's
direction, whereas preference stockholders do not.
However, the board of directors should ensure that preference shareholders receive
dividends first because they are given a fixed proportion of dividends each year that
was agreed upon at the time the shares were issued, whereas regular shareholders
receive different amounts of dividends each year.
According to Lawrece (2021) the key difference between ordinary and preference
shares is that preference shares have a higher priority in terms of dividend payment
and in the event of a bankrupt company's liquidation.
It's worth noting, though, that the preference shares can be converted to ordinary
shares if the company's owners agree.
Reference:
Lawrence. 2021. 5 Differences Between Ordinary Shares And Preference Shares.
[Online]. Available from: https://focaldifferences.com/difference-between-ordinaryshares-and-preference-shares/. [Date Accessed: 20.11.2021].
2. Danicka, I agree with you views.
Ordinary shareholders are paid last in an insolvent company's liquidation. When a
firm declares bankruptcy, creditors are paid first, followed by preference
shareholders, and common shareholders are paid last. Common stockholders will
most certainly receive less assets as a result of this.
While preference shareholders are not promised dividends, they do have a right to
be paid ahead of ordinary shareholders if the company makes a profit.
Ordinary shareholders must be prioritized because they are the ones who experience
the business's highs and lows because their pay-outs are based on its performance.
Derfoldy (2020) argues that ordinary shareholders may not receive dividend
payments every year, and payments to ordinary shareholders depend on
reinvestment decisions made by the company directors. As a result, ordinary shares
are riskier than bonds or preference shares.
Reference
Derfoldy, M. 2020. Different types of shares; ordinary versus preference shares.
[Online]. Available from: https://fincor.co.za/different-types-of-shares-ordinaryversus-preference-shares/. [Date Accessed: 20.11.21].
Question 2: Leasing vs buying
Office space is a necessity, but choosing to buy or lease is a big decision.
Do you think that buying an asset is always a better option than leasing? Motivate
your view
The answer is dependent on your circumstances. Leasing equipment can be a
suitable alternative for entrepreneurs with limited resources or who require
equipment that must be changed every few years, but purchasing equipment is a
preferable option for established enterprises or equipment with a lengthy useful life.
However, because each company is different, the decision to buy or lease business
equipment must be decided on an individual basis.
Leasing business equipment and tools saves money and gives you more freedom,
but it could end up costing you more in the long run. On the opposite, buying
company equipment is enticing because of the ownership and tax benefits, but the
large initial expenditures mean it isn't for everyone.
According to Laurence (n.d.), leasing allows firms to solve the issue of obsolescence.
If you utilize your lease to obtain products that are likely to become obsolete in a
short period of time, such as computers or other high-tech equipment, the lessor
bears the cost of obsolescence. After your lease expires, you are able to lease new,
higher-end equipment.
The most obvious advantage of buying business equipment is that you gain
ownership of it. This is especially true when the property has a long useful life and is
not likely to become technologically outdated in the near future, such as office
furniture or farm machinery.
Reference:
Laurence, B.K. no date. Business Equipment: Buying vs. Leasing Decide whether to
lease or buy by learning about the pros and cons of each. [Online]. Available from:
https://www.nolo.com/legal-encyclopedia/business-equipment-buying-vs-leasing29714.html. [Date Accessed: 21.11.21].
Gupta (2021) delineates buying is an activity in which title of ownership is assumed,
annd any risk or reward after the payment of consideration is assumed by the
buyers, whereas leasing is an activity in which only possession and right to use an
asset is acquired for a specific period of time in lieu of a periodic payment and
ownership and title are not transferred.
Leasing and Buying decisions should be made with the entire business in mind, not
just the bottom line.
All pros and downsides of both leading and buying must be considered. If the longterm benefits of leasing surpass the cost of purchasing, purchasing at the time can
be strongly considered if you have the financial means.
In conclusion, some assets make good business decision when you buy them instead
of leasing and vice versa, each case must be scrutinised wholistically.
Reference:
Gupta, N. 2021. Difference Between Buying and Leasing. [Online]. Available from:
https://www.wallstreetmojo.com/buying-vs-leasing/. [Date Accessed: 21.11.2021].
Dear Colleague,
You touch on some good points.
According to Clydesdale Bank (2017) buying an asset rather than leasing it is usually
cheaper in the long run. They also point out that you won't be able to claim the
entire cost as a business expense because the asset's value is depreciated over
time.
And recommend buying, if:



The asset is critical to your overall business success, and you use it
frequently.
You want to be in charge of the asset.
It's simple to update or upgrade, and it can scale up if demand grows.
You're renting an asset when you lease it for a specified amount of time. The leasing
company owns the asset, but your company has exclusive use of it for the duration
of the lease.
And recommend leasing, if:



The asset could become obsolete fast and will need updating soon.
You don’t want to spend your cash reserve or go into debt.
The asset needs specialist support, and you don’t want to employ a full-time
person to manage it.
In conclusion, one cannot take a blanket approaching when leasing or buying
Reference
Clydesdale Bank. 2017. Leasing or buying assets – the pros and cons. [Online].
Available from: https://secure.cbonline.co.uk/business/businessnews/articles/leasing-buying-assets-pros-cons. [Date Accessed: 22.11.21].
Equipment leasing (Bushnell, 2021) is a method of financing in which a small
business owner rents rather than buys equipment. Costly equipment, such as
machinery, trucks, computers, and other instruments needed to run a firm, can be
leased by business owners.
The equipment is rented for a set amount of time. The business owner must return
the equipment, extend the lease, or purchase the equipment after the contract
expires.
Equipment leasing is more expensive in the long run than buying it outright, but for
cash-strapped small business owners, it's a way to get needed equipment without
spending a lot of money up front.
There is no one-size fits all approach. Key considerations have to be made.
Especially for smaller business who cannot afford to buy equipment or assets.
Reference:
Bushnell, M. 2021. Equipment Leasing: A Guide for Business Owners. [Online].
Available from: https://www.businessnewsdaily.com/8083-equipment-leasingguide.html. [Date Accessed: 22.11.21].