Media group incorporation - Media Essay Example

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To: President of the Board

From: Chief Financial Officer

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Date: 9th May 2007

Subject: Financial Analysis: its need and main terms used
Financial Analysis of Independent Divisions and Corporation

The majority of the divisions are incurring losses as portrayed in the income statement of 2006.  Indeed the only sections that are attaining a profit are the broadcast and internet training.  However, the return on equity is provided only by the internet training, which amounts to 1%.  The property, plant and equipment remained the same, while the current assets decreased from 2005 to 2006.  While the losses increasing, showing that the return on assets of the corporation is deteriorating.

Overall, the whole group holds a good financial position as reflected by the working capital of $4,897,850 and the current ratio of 1.90:1.  However, a weak liquidity position is noted for the internet training and the magazine divisions.  In fact, the working capital for these two is -$43,100 and -$194,650.  The current ratio also portrays that the current assets cannot even cover the current liabilities by one time in theses sections.

A very high debt to equity ratio is noted for Media Group Incorporation, which reaches 721%.  This shows that debts of the firm highly exceed the equity capital.  Firms like Media Group are considered risky companies, especially when profitability and liquidity are decreasing.

 

Key Accounting Ratios

Key accounting ratios that were applied in the previous section in order to examine the financial health of Media Group Incorporation and its divisions are explained below:

·          The working capital measures the amount of liquidity that the company holds in order to sustain the smooth running of the firm’s operations.

·          A ratio that is adopted to examine the capital structure of the firm is the debt to equity ratio.  This reveals the percentage of debt in relation to the equity of the organization.

·          Under the current ratio, we analyze the ability of the current assets of the firm to cover the current liabilities that the company holds.

·          The return attained by the shareholders of the corporation on their investment is determined by utilizing the return on equity ratio.

·          An activity ratio that portrays the efficiency with which the total assets of the organization had been employed in the generation of turnover is measured by the return on assets ratio.

Importance of above stated Accounting Ratios

The aforementioned accounting ratios are important for an organization because they show the financial health of the firm.  The ratios described above consider a number of facets of a company, which shed light on its financial performance and position.  For instance, the working capital and current ratio indicate the liquidity position of the company.  A firm with a weak financial position is risking bankruptcy because they may end up incapable of meeting their debt commitments.

The efficiency of management in utilizing the firm’s resources in generating sales is also determined through these ratios.  In addition the return attained by equity investors and the overall risk of the organization in terms of its capital structure are also determined.  Such ratios are useful in financial analysis when they are compared with the industry average or examined over time, because they show the progression or regression the finance of the firm is undergoing.  Ratios by themselves are meaningless and therefore to be fruitful they have to be compared.

Solutions to improve accounting ratios

Management should take hands on approach on the profitability matter in order to induce efficiency and boost the firm’s profitability.  Proper cost control exercises should be adopted in order to limit expenditure and appropriate examination of the market should be carried out in order to identify ways to improve the market share and boost sales.

The working capital of a department can be enhanced by adopting proper negotiations with trade suppliers to increase the credit limit.  Likewise, proper credit control policies and procedures should be enacted to decrease the time taken to collect the money due from our debtors.

With respect to the group’s high gearing, ideally shareholders should invest additional common stock in order to inject additional cash into the group to enable the firm to invest in feasible projects to decrease the critical losses that are arising in the corporation.
Task 2 – Master Budgets Preparation

Budgeted Income Statement
Broadcast
Magazine
Professional
Internet
Total
for 2007

Books
Training

$’000
$’000
$’000
$’000
$’000
Net Sales
2,500.00
1,300.00
12,200.00
1,100.00
17,100.00
Cost of goods sold
1,777.78
1,124.47
11,030.69
550.00
14,482.94
Gross Profit
722.22
175.53
1,169.31
550.00
2,617.06
General and Administration
702.22
365.08
3,425.14
309.10
4,801.54
Depreciation
16.98
86.19
735.30
23.46
861.93
Profit before Interest and Taxation
3.02
–       275.74
–        2,991.13
217.44
–  3,046.41
Interest Expense

52.55
467.55
6.02
526.12
Taxable Income
3.02
–       328.29
–        3,458.68
211.42
–  3,572.53
Tax (Expense)/Benefit
–          0.46
139.65
1,446.02
–        82.96
1,502.25
Net Income
2.56
–       188.64
–        2,012.66
128.46
–  2,070.28
Budgeted Balance Sheet for 2007
Broadcast
Magazine
Professional
Internet
Total

Books
Training

$’000
$’000
$’000
$’000
$’000
Non-Current Assets

Property, plant and equipment
566.00
2,873.00
24,510.00
782.00
28,731.00
Accumulated Depreciation
–      235.96
–    1,508.33
–      12,756.75
–      410.55
-14,911.59
Deferred Tax Assets

128.91
1,360.68

1,489.59

330.04
1,493.58
13,113.93
371.45
15,309.00
Current Assets

Accounts Receivable
300.00
390.00
8,608.00

9,298.00
Prepaid Expenses

48.00
401.00

449.00

300.00
438.00
9,009.00

9,747.00
Current Liabilities

Bank Overdraft
1,330.69
133.07
133.44

1,597.20
Accounts Payable
86.67
567.33
3,952.35
33.00
4,639.35
Current Debts

130.97
1,165.62
13.10
1,309.69

1,417.36
831.37
5,251.41
46.10
7,546.24
Net Current Assets
–   1,117.36
–       393.37
3,757.59
–        46.10
2,200.76
Non-Current Liabilities

Long-Term Debts

489.26
4,373.24
34.07
4,896.57
Deferred Tax Liabilities
0.41


75.42
75.83

0.41
489.26
4,373.24
109.49
4,972.40
Net Assets
–      787.73
610.95
12,498.28
215.86
12,537.36

Share Capital and Reserves

Common Stock

1,000.00
Preferred Stock

1,000.00
APIC

10,000.00
Previous Year Retained Earnings

2,607.64
Current Year Losses

–  2,070.28

12,537.36
Budgeted Cash Flow Statement for 2007
$’000

Operating Activities

Net Loss
–       2,070.28
Depreciation
861.93
Operating Loss before working capital adjustments
–       1,208.35
Working Capital Adjustments

Increase in Accounts Receivable
-568.02
Increase in Accounts Payable
288.57
Net cash used in operating activities
–       1,487.80

Financing Activities

Payment of Long-Term Debts
–       1,309.68
Net Cash used in financing activities
–       1,309.68

Decease in cash and cash equivalents
–       2,797.48
Cash and cash equivalents at beginning of year
1,200.28
Cash and cash equivalents at end of year
–       1,597.20
 

Task 3 – Capital Expenditure Appraisal

Cash Inflow Net of Taxation = $1,300,000 x (100% – 40%) = $780,000

Cash Inflow/(Outflow)
Discount Rate at 7%
Present Value
-10,000,000
1.0000
-10,000,000
780,000
0.93458
728,972.40
780,000
0.87344
681,283.20
780,000
0.81630
636,714.00
780,000
0.76290
595,062.00
780,000
0.71299
556,132.20
780,000
0.66634
519,745.20
780,000
0.62275
485,745.00
780,000
0.58201
453,967.80
780,000
0.54393
424,265.40
780,000
0.50835
396,513.00
Net Present Value
-4,521,599.80
A negative net present value is attained portraying that the project is not viable.

Payback Method
Description
$
Capital Expenditure Cost
(10,000,000)
10 years Cash Inflow (10 x $780,000)
7,800,000
Outstanding balance
-2,200,000
The net cash inflow after tax will not cover the initial cost, leading to its unfeasibility.
 

Task 4 – Effect of new Investment

Income Statement – Operating costs will diminish by $1,300,000 and net profit after tax will increase by $780,000 per annum.

Balance Sheet – the retained earnings will increase by $780,000 together with the cash and cash equivalents.  The capital expenditure which will probably be financed by long-term debts will direct a rise in such figure of 10 million.

Cash Flow Statement – the net cash from operating activities will increase by $780,000.  Eventually the loan payments will lead to cash outflow in the financing activities.

 
References:

 

Brockington B. R. (1996). Financial Management. Sixth Edition. London: DP Publications.

 

Randall H. (1999).  A Level Accounting.  Third Edition.  Great Britain:  Ashford Colour Press Ltd.

 

Weetman P. (2003). Financial and Management Accounting. Third Edition. England: Pearson Education Limited.

 

 

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