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Foundation of Financial Management Study on mlk plc Airlines Case Study

Foundation of Financial Management Study on mlk plc Airlines Case Study Sample

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Foundation of Financial Management: Study on mlk plc Airlines Assignment

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Introduction - Foundation of Financial Management: Study on mlk plc Airlines Assignment

During continuation of financial management, the company would need to have proper record of financial statements; along with this, several financial techniques can be used for measuring the changes within the financial values of the company. In this regard, some factors would need to consider for determining financial feasibility of the firm, for example business profitability and liquidity refers to maintain business capability of surviving in market. Thus, business profitability and liquidity need to maintain (Barclay and Smith, 2020). Towards the continuation of this study, the researcher has considered MLK Plc Airlines. According to provided information, the company does not avail extra capital for continuing operating activities. Here, the researcher has discussed some important factor for raising business capital considering share capital and share allocation with business debt allocation. An investment appraisal method has been shown for business investment and possible gain from that. Apart from that, some important factors are discussed for increasing business capital of MLK airlines.

a) Discussing the statement made by both CFO and CEO:

In this case, the board members have stated that both assets and liabilities for the year ended December 2020 are matched. However, considering current assets are less than current liabilities (total current liabilities £70 million and current assets £40 million). Therefore, a deficit of £30 million has been found. Therefore, it is necessary for the company to increase their current assets to have sufficient business liquidity. As per the statement of Brav, Jr., et al. (2005), business liquidity is working capital, which deals with all necessary operating activities and the company would need to allocate other current balances like receivables and cash balances. However, in the contrary Brounen, et al. (2006) argued that business liability is a mandatory for increasing business-operating activities. Because, business debt comes with bank loan and other market borrowings; in this case, share capital can be considered. The share allocation provides capital for business finance and dividends are liability to the shareholders.

The focal point of the gathering was in how to fund the buy. MLK had £20 million in real money and attractive protections see table. Anne, the Chief Financing Officer (CFO), brought up that the organization required £10 million in real money to meet the everyday requests of the business and as a possibility save. This implies that there will be cash shortage of £15 million for the acquisition of airplanes, which the organization needs to cover either by the offer of normal stock or by extra getting. While conceding that the contentions were at last adjusted, Anne suggested an issue of stock. She brought up that the carrier business was likely to wide swings in benefits and the firm ought to be mindful to stay away from the danger of unreasonable getting. She assessed that in market esteem terms the drawn out obligation proportion was around 58% and that a further obligation issue would build the proportion to 61%.

Particulars

Amount £ million

Gross profit

57.5

Less: Dep.

20

Less: Interest value

7.5

EBIT

30

Income tax

10.5

Net profit

19.5

Dividend value

6.5

Statement of financial position

Liabilities

Amount £ million

Assets

Amount £ million

Debt value

50

Cash equivalents

20

Additional CL

20

Additional CA

20

10% bond, due 2035

100

FA

250

shareholders' equity

120

Total liabilities

290

Total assets

290

As per the case scenario, it can be stated that the board members have stated that both assets and liabilities for the year ended December 2020 are matched. However, considering current assets are less than current liabilities. Therefore, a deficit of £30 million has been found. Therefore, it is necessary for the company to increase their current assets to have sufficient business liquidity. From the viewpoint of Fernandes, et al. (2001), business liquidity is working capital, which deals with all necessary operating activities and the company would need to allocate other current balances like receivables and cash balances. However, in opposed to that Graham & Harvey (2001) argued that business liability is a mandatory for increasing business-operating activities. Because, business debt comes with bank loan and other market borrowings; in this case, share capital can be considered. In this case, the company has outstanding share of 10 million shares at £10 per share. Therefore, total valuation of outstanding share would be:

Particulars

Amount £ million

Cumulative

Initial investment

25.00

-25

Year 1 flow of cash

4.0

-21

Year 2 flow of cash

4.0

-17

Year 3 flow of cash

4.0

-13

Year 4 flow of cash

4.0

-9

Year 5 flow of cash

4.0

-5

Year 6 flow of cash

4.0

-1

Year 7 flow of cash

4.0

3

Year 8 flow of cash

4.0

7

Year 9 flow of cash

4.0

11

Year 10 flow of cash

4.0

15

Year 11f low of cash

4.0

19

Year 12 flow of cash

4.0

23

Year 13 flow of cash

4.0

27

Year 14 flow of cash

4.0

31

Year 15 flow of cash

4.0

35

Year 16 flow of cash

4.0

39

Year 17 flow of cash

4.0

43

Year 18 flow of cash

4.0

47

Year 19 flow of cash

4.0

51

Year 20 flow of cash

4.0

55

Net present value (£ million)

3.4

Payback period (Years)

5.75

Internal rate of return (IRR)

220%

The implementation of investment appraisal method is necessary for determining the future values of current investment in business project; based on that necessary investment decision can be taken (Graham and Harvey, 2001). As per the calculation, it has been found that the expected NPV would be £3.4 million. The expected payback period would be 5.75 years; that means within the expected time the invested capital can be recovered. Therefore, this investment can be considered. However, there is a deficit of £15 million to purchase of aircrafts. On the other hand, the increased IRR rate indicates a higher return over the invested capital.

b) Highlighting and discussing different capital structure and dividend theory:

Capital structure theory:

  • Net income theory is an important theory for capital structure. In this case, the company would need to increase the revenue and reduce the production costs so that cost of capital can be reduced to have a perfect capital structure. Therefore, it is necessary to have sufficient cash flows in business with investment and other operating activities (Guzhva, et al. 2003).
  • Net operating income approach is another theory for capital structure. In this case, the market debt value would need to be subtracted from equity value in market. According to this theory, the cost of debt is constant irrespective degree of leverage. Therefore, increase of funds would leverage the capital structure (Hauser, 2013).

Dividend theory:

The Walter’s model is a dividend approach, under which the dividend value helps to determine the value of the firm. This approach is helpful for measuring the relationship between internal rate of return (IRR) and cost of capital (K). In this process, the shareholders’ wealth will be increased (Miller and Modigliani, 1958).

c) Important factors need to consider for a successful rising of capital:

Capital increase or fund raise for business investment both are similar and in this case, the company might have different approaches and options so that unnecessary costs can be reduced. Therefore, for fund raising, the company considers share allocation. In this case, share price plays an important role (Miller and Modigliani, 1963). The debt is an important factor, because EPS and EBIT play important role in this case.

However, it is necessary to have break-even point so that the loss factor can be received. Nevertheless, increase of revenue would lead to reduce the market debt. In this respect, reduction of break-even point would lead to have disadvantage to debt (Smith and Watts, 1992). Therefore, increase in EPS and EBIT would lead to increase company’s cash inflows and that would reduce the debt of market.

d) Recommendation to the board:

  • In this case, the company would need to focus on business revenue and other business liquidity factors. Along with this, fair dividend policies are important.
  • Share allocation should be in proper way and shareholders would need to have perceived dividend.
  • Investment appraisal methods would need to implement so that business investment can be done.
  • Here, break-even point would need to maintain to avoid business and market debt. Thus, EBIT and EPS would need to be increased.
  • As per capital structure theory, net profit and operating profit would provide supportive cash flows in business.

Conclusion:

At the end, it can be concluded that the researcher has considered MLK Plc Airlines. According to provided information, the company does not avail extra capital for continuing operating activities. Here, the researcher has discussed some important factor for raising business capital considering share capital and share allocation with business debt allocation. An investment appraisal method has been shown for business investment and possible gain from that. Apart from that, some important factors are discussed for increasing business capital of MLK airlines. As per the overall discussion, it can be stated that it is necessary to have break-even point so that the loss factor can be received.

Reference list:

Barclay, M. J. and Smith, C (2020) “The capital structure puzzle: Another look at the evidence”, Journal of Applied Corporate Finance, 32(1), 80 – 92.

Brav, J.r., Graham, J. R., Harvey, C. R. and Michaely, R, (2005) “Payout policy in the 21st century”, Journal of Financial Economics, 77(3), 483 – 527.

Brounen, D., de Jong, A., and Koedijk, K. (2006), “Capital structure policies in in Europe: survey evidence”, Journal of Banking and Finance, 30(5), 1409 – 1442.

Fernandes, Elton ; Capobianco, Heloisa Márcia Pires (2001), “Airline capital structure and returns”, Journal of Air Transport Management, 7(3), pp.137-142

Graham, J. R., and Harvey, C. R. (2001), “The theory and practice of corporate finance: Evidence from the field”, Journal of Financial Economics, 60(2), 187-243.

Guzhva, Vitaly S ; Pagiavlas, and Notis, (2003) “Corporate capital structure in turbulent times: a case study of the US airline industry”, Journal of Air Transport Management, 9(6), 371-379

Hauser, R. (2013) “Did dividend policy change during the financial crisis?”, Managerial Finance 39(6), p.584-606

Miller, M. H. and Modigliani, F (1963), “Dividend Policy and Market Valuation: A Reply” The Journal of Business, 36(1), 116-119

Miller, M. H. and Modigliani, F, (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment” The American Economic Review, 48(3), 261-297

Smith, C,. Ikenberry D., Nayar.A. Anda, J, and McVey, H. (2020) “Morgan Stanley Roundtable on Capital Structure and Payout Policy”, Journal of Applied Corporate Finance, 32(1)

Smith, C. W., and Watts, R. L. (1992). “The investment opportunity set and corporate financing, dividend, and compensation policies”. Journal of Financial Economics, 32(3), 263-292.

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