Financial Analysis Of Proposed Transaction And Preparation

Theory of Capital Budgeting Technique for Long-Term Transactions

Discuss about the Financial Analysis of Proposed Transaction and Preparation.

The purpose of this task is to evaluate the financial viability of the transaction that the company is proposing to undertake and preparing information memorandum for management.

Theory- Capital budgeting technique for long-term transactions.

The Information memorandum is the document defining the work and details of financing. The financial viability of transactions related to long-term projects could be evaluated using different capital budgeting techniques. The techniques of Net Present Value, Internal Rate of Return, payback period etc can be used to evaluate the transactions (Bierman Jr & Smidt, 2012).  The Information memorandum is prepared so that management could get an overview of the financial viability of the project.

Application

I plan to use all this technique so that the transaction company enters into is beneficial and useful for both long and short term.  In order to provide management the details of the transactions I will prepare a information memorandum providing the details and logic behind the transaction.

 Task- Research of Industry Sector

The purpose of this task is to conduct research of the industry sector.

Theory- Comparison of Key financial ratios

It is important for the success of the business that management should be aware of its competition and general business environment.  The preparation of monthly or weekly financial report and comparing it with the industry and competition is a routine exercise for any successful business. The financial performance of the company can be effectively compared with competitors by calculating key financial ratios. There are few important ratios that reflect the overall conditions of the business and when these ratios are compared with industry and competitors then the financial standing of the company could be ascertained. The important ratios are Current ratio, Debt equity ratio, profitability ratio, return on assets, return on equity etc (Brigham & Ehrhardt, 2013).

Application   

I plan to use all these ratios to compare the financial position of the company with the competitors.  It is my plan to calculate the ratios on monthly basis and compare it with industry data.  This will be helpful because if any corrective measures are required to be taken for improving the performance of the company then it can be immediately undertaken.

Task- Preparing financial statement, projected cash flow and income tax projection

The purpose of this task is to provide complete financial transaction along with estimates.

Theory- Forecasting of financial transactions.

The financial statements are the report that reflects the financial position and activities of an enterprise in a structured format. The financial statements are prepared in accordance with the format prescribed by statute. The projected cash flow shows the estimate of cash inflow and cash outflow that the company is expecting. It is important because liquidity is the essential requirement for any business. If the company lacks liquid cash then the functioning of the business might be hampered as a result the company may incur loss. It is mandatory for a company to pay taxes therefore it is prudent to make a projection of tax to be paid so that any penalties could be avoided (Cole & Gerhard, 2014).

Application of Capital Budgeting Techniques

Application

I will prepare the financial statements in accordance with applicable format as prescribed by law. In order to prepare a projected cash flow I will prepare a plan of all the cash inflows and cash outflows. In order to prepare a plan I will estimate the overall business activity beforehand. The tax regulations are clear to me so while preparing the estimate I will also prepare a projection of tax that will be helpful to the business.

Task- Preparation and proof read of investment management performance, reports and client fees calculation.

The purpose of this task is to manage investment efficiently and calculating client fees.

Theory- Calculation of IRR using weighted average market value of securities.

The market is extremely volatile and it is continuously changing so it is important for an investor to be continuously updated about the market and regulatory changes. There is a theory proposed by the CFA institute that a performance report should at least have rate of return and that should be calculated using weighted average market value of securities (Moten Jr & Thron, 2013). The client fees should be calculated using accrual principle.

Application

I wish to apply the concept of calculating IRR using the market value of investment while preparing the investment performance report. I will also thoroughly proof read the entire report to be sure that there are no mistakes in calculating the performance of investments. I plan to apply the concept of accrual while calculating client fees.

Task- Update and maintain spreadsheet for Equity Portfolios: Stock Analysis pages.

The purpose of this task is analyze the stock investment by preparing and updating spreadsheets.

Theory- Tracking of Investment using excel.

The investments activities can be tracked effectively using excel spreadsheets. It can also be used for calculating return, profit or loss using closing price and standard deviations (Walkenbach, 2013). The trackings of investments are important because a loss making investment can cost heavily to the company. Due to the heavy cost that the company has to bear, it becomes such an essential task to track investment effectively.

Application

I wish to track investment using excel and calculate return on investment. This will help me to always be updated about the money invested in the market.

Task-Budget forecast monitoring/ identifies financial status by comparing and analyzing actual sales with plans and forecast.

The purpose of the task is to evaluate the financial position of te company by comparing budgeted figures with actual figures. 

Theory- Budgeting

In order to prepare a financial forecast a budget is prepared for internal management purpose. These budgets are prepared on monthly basis for monthly monitoring. The differences between the actual and budgeted figures are calculated and the reasons for such differences are analyzed (Hope & Fraser, 2013).

 Application

I wish to apply the same technique for determining the difference between actual and forecasted figures. I will prepare the budget every month so that the reasons for such difference could be analyzed as early as possible. This process will ensure that problems identified are solved and the corrective measures are taken immediately. This task is very important as it will give direction to the company so I look forward to conduct this task with utmost sincerity.

Task – Research of Industry Sector

Task -Analysis of important benchmarking ratio

The purpose of this task is to choose a benchmark and compare the performance of the company with that of benchmark.

Theory- Benchmarking and performance analysis.

In order to maintain the benchmarking data of the companies the various type of the operations and the income of the company are compared with another company which is considered best according to the industry standards and the selected company is able to compare the results of services (Camp, 2013). This is particularly helpful in financial companies where the data needs to be compared with the best performer in the industry.

Application

I wish to apply the forecasted ratio of the various types of the financial data on the basis of the ratio calculated in the benchmarking performance of the company and compare the standings of the company based on the present industry standards.

Task- Improvement in the financial status and the analysis of the results and continuous monitoring of the variances

Theory- Variance Analysis.

The various type of the monitoring of the data is based on the graphical and statistical representation is helpful for the purpose of the evaluation of the various types of the changes in the present and the future (Spronk et al., 2016).

Application

 I have used this data for tracking the changes in the financial data are also helpful in the assessment of the future viability of the project and the companies are able to assess the profitability aspect through the simple representations of the graphs. The improvement in the present policies of the project is evaluated based on the changes in the monitoring of the report.

Task-Reconciliation of the transactions by comparison and the correcting of the data

Theory- Reconciliation Statement.

The purpose of the reconciliation of the transactions by the comparison and the correcting of the data are useful for the evaluation of the various type of the graphical representation of the financial data. This data is particularly helpful for the purpose of the comparison of various type of the financial data such as stock market (Shah, 2013).

Application

I have made use of this technique for reporting and comparison of the various types of the statistical and financial data, which are needed for the purpose of the evaluation of a portfolio of the selected organization I am also able prepare detailed report of the analysis based on the graphical representation of the data. The reconciliation of the transaction is also useful for a quick evaluation of the changes, which are needed to be made in the project and an easy identification of the project problems and works to provide an easy solution.

Task – Implementation of Forex knowledge when one price is paid in exchange of another.

Theory- Foreign Exchange Management.

Foreign exchange is referred to as the process of conversion one currency into another. It is also referred to as the global market in which the currencies are exchanges around the clock (Jacque, 2013). 

Application

I intend to apply the various types of the theory where there is higher amount of hedging cost, which is related to increased currency volatility. I will be also able to assess the various types systematic importance of the big banks, which is involved, with the forecasting of the losses and the potential risk involved with the forex transaction. Although the currency trading is seen as a zero sum policy, still the big banks need to properly manage forex for currency risk hedging.

Theory – Comparison of Key Financial Ratios

Introduction

The industry selected for the purpose of problem evaluation is Insurance industry. The evaluation of the insurance company is based on the report prepared based on the core segments namely General Insurance, Global Life and farmers insurance. The main purpose of the research is to know about the present problem of the company and different issues presently faced by the insurance company. (Cummins & Weiss , 2014)

Macroeconomic Trend- The major threat is seen in the dealing with the challenging economic situation as the insurers has to take underwriter’s margin. In the insurance industry, the major issues are seen in meeting the customer needs with the new expectations this is due to the change in the macroeconomic trends in the industry. The Global financial crisis (GFC) continues to affect the growth of the insurance companies. This mostly evident countries like U.S. and European countries. The state of the economic development is closely related to geopolitical events. The consumers facing the GCF had to control their spending on the insurance policies. (Pwc.com., 2016)

Reputational Risk – Some of the other problems of the insurance industry are related to the reputational risk. This is evident due to the aggressive marketing policies for both life and general insurance. In many cases, it has seen that the insurance companies do not provide what was promised at the time of the time of creation of the policy. Sturm, 2013)

Availability of cost of capital – Some of the main problems in the insurance companies in the insurance companies is mainly evident due to the limited availability of the cash management policies of the companies. In many claim amount needs to be settles quickly especially in cases of overseas payments. In many countries it has been observed that the insurance companies were unable to maintain a suitable allocation of the cost components associated to the commission rates and the service cost for the customer care. This is closely related to the capital budgeting needs (Koijen & Yogo, 2014)

Adding value to the company

With the attributes that I posses, I can contribute to the changing needs of the customers’ needs.  This will lead to an improved customer approach and help the insurance companies to have a better reputation in the market. The attributes will look forward to build a trusted relationship with the customer. The extensive understanding of the macroeconomic environment analysis will further help to assess the present economic situation of the country and know about the spending habits of the people. (Suriadi et al., 2013).

Adding value to the finance team

The various types of the alternate ideas for solving the current problems of the industry need to be addressed with the allocation of the funds properly into various types of the financial institutions like banks. The company also needs to forecast the requirement of the fund in the various type of the project by using capital budgeting techniques such NPV, IRR and payback period method. This will helps the company to evaluate the various types of the requirement need for long-term financing of the project. The evaluation of the projects based on these techniques helps the company to know about the available amount of free cash flow (Embrechts et al. 2013)

Conclusion

The various type of the findings of the report shows problems in the insurance industry such as poor customer service, shifting macroeconomic trend and requirement of cost of capital. Based on the various type of the problems identified in the selected industry the companies needs to implement technique such as NPV, payback period and IRR practices which has been implemented on the basis of problem evaluation of the present industry to address the financial problems. The solution provided will ensure that the company will be having sufficient amount of the free cash flow and the company is able to evaluate then different types of the option to make payment to the insurance claims, which were due to the non-availability of the free cash flow during a particular financial year. Hence, the implementation of the above stated technique will significantly improve the performance of the company on both financial basis and operational basis.

Reference List

Bierman Jr, H., & Smidt, S. (2012). The capital budgeting decision: economic analysis of investment projects. Routledge.

Brigham, E. F., & Ehrhardt, M. C. (2013). Financial management: Theory & practice. Cengage Learning.

Camp, R. C. (2013). Benchmarking: the search for industry best practices that lead to superior performance. Milwaukee, Wis.: Quality Press; Quality Resources, 1989.

Cole, D., & Gerhard, L. (2014). U.S. Patent No. 8,768,809. Washington, DC: U.S. Patent and Trademark Office.

Cummins, J. D., & Weiss, M. A. (2014). Systemic risk and the US insurance sector. Journal of Risk and Insurance, 81(3), 489-528.

Embrechts, P., Klüppelberg, C., & Mikosch, T. (2013). Modelling extremal events: for insurance and finance (Vol. 33). Springer Science & Business Media.

Hope, J., & Fraser, R. (2013). Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.

Jacque, L. L. (2013). Management and control of foreign exchange risk. Springer Science & Business Media.

Koijen, R. S., & Yogo, M. (2014). The cost of financial frictions for life insurers. The American Economic Review, 105(1), 445-475.

Moten Jr, J. M., & Thron, C. (2013). Improvements on Secant Method for Estimating Internal Rate of Return (IRR). International Journal of Applied Mathematics and Statistics™, 42(12), 84-93.

Pwc.com., (2016) Retrieved 31 July 2016, from https://www.pwc.com/us/en/insurance/publications/assets/pwc-top-issues-the-insurance-industry-2016.pdf

Shah, P. (2013). Financial Accounting. OUP Catalogue.

Spronk, J., Steuer, R. E., & Zopounidis, C. (2016). Multicriteria decision aid/analysis in finance. In Multiple Criteria Decision Analysis (pp. 1011-1065). Springer New York.

Sturm, P. (2013). Operational and reputational risk in the European banking industry: The market reaction to operational risk events. Journal of Economic Behavior & Organization, 85, 191-206.

Suriadi, S., Wynn, M. T., Ouyang, C., ter Hofstede, A. H., & van Dijk, N. J. (2013, June). Understanding process behaviours in a large insurance company in Australia: A case study. In International Conference on Advanced Information Systems Engineering (pp. 449-464). Springer Berlin Heidelberg.

Walkenbach, J. (2013). Excel 2003 bible (Vol. 36). John Wiley & Sons.