Madison Plc Funding Analysis

Madison Plc Funding Analysis
Madison Plc Funding Analysis

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Madison Plc Funding Analysis

Introduction

Organizations are usually formed with an objective of gaining profit and attaining growth. This means that the management of an organization is always aimed at ensuring that operations are in the right order for such to happen. This calls for various processes to be initiated for the purpose of proper operation. Firstly, proper strategic planning has to be carried out.

Secondly, the finances of an organization have to be organized so that the reported results may be impressive. To understand better, company analysis is necessary since it gives a brighter picture of an organization’s financial status. This report will focus on Madison Plc for analysis. It will give a detailed explanation of the various funding sources that Madison Plc can have for its expansion plans.

Additionally, the advantages and disadvantages of each source of funding identified will be explained deeply. For better understanding, the report will also focus on the ways that Madison Plc can manage the sources of funding for better results. In the main part of this report, matters related to management of working capital will also be highlighted. 

For better understanding of this company’s investment options, analysis of different options will be highlighted and implications outlined properly. Additionally, the report will show ratio analysis of two companies that it is aiming at acquiring; thus getting an opportunity to make a choice. In the conclusion part of this, a summary of the main point will be indicated for better understanding.

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Funding

For most organizations, getting adequate funding is one of the major challenges of being in business (Johnson, Scholes & Whittington 2007, p. 12). This is because resources are usually scarce, and money is part of scarce resources. Madison Plc has to seek more funding for the purpose of expanding its operations across the globe as planned. This means that the company has to look for the sources of more money. The different sources of funding that Madison Plc can utilize are explained below.

  1. Debt financing

Debt financing refers to raising capital for a business through getting loans or credit facilities from lenders (Gupta 2011, p. 43). This means that an organization may go ahead and apply for financing in some of the known lenders. Interestingly, companies are known to rely on lenders as a means of accessing more capital for its operations (Kaplan & Norton 2004, p.98).

Therefore, Madison Plc can move ahead and approach some of the available lenders for funds to push forward its expansion agenda. This may be done through various arrangements; Madison Plc may get into an agreement with lenders regarding the percentage amount of gain to share. Secondly, the parent company and Madison Plc may agree on the payment period for any more financing granted.

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  • Advantages of debt financing

Debt financing is associated with various benefits. One of the advantages of using debt financing is that the risk associated with giving some ownership to new investors is reduced. With debt financing, an organization obtains money from lenders who do not need any part of the company. As a matter of fact, debt financing connects the lender and an organization through the periodic payments.

Secondly, it does not subject an organization to divided control as is the case with equity financing. This means that decision making organ of the organization keeps on functioning normally. The third benefit of debt financing is that an organization is able to have more money as retained earnings. It has been observed that despite the fact that the company pays interest on debt, the amount of money spared which would have gone to additional investors witnessed in equity financing.

  • Disadvantages of debt financing

One disadvantage of debt financing is that the company bears the burden of debt management. Having taken financing from loans, an organization has to ensure that the facility is properly management (Kaplan and Norton 2006, p.89). The burden of following up on the repayment records is tedious and a burden to an organization. Additionally, debt financing involves more cost for an organization. According to Arnold (2009, p.24), going for debt financing means that an organization has to pay interest to cover the cost of getting the credit facility.

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  1. Equity financing

Equity refers to the shares of an organization. Therefore, Madison Plc can use equity as to fund its operations. Through equity, this company can invite interested investors to purchase some shares in the company. This will make the investors shareholders while the company benefits from the money paid for the shares.

Advantages of funding through equity

One advantage of equity financing is that it creates a possibility of meeting people who are beneficial to an organization. Having investors purchase the shares of a business may create the benefit of having knowledgeable people form part of new investors. The benefits may also come as a result of having new investors who have more resources to lend to the organization. Having more able people get in the ownership of a business is always very important.

This is because the new investors may extend more money for use in the operations of an organization.  Additionally, the new shareholders may be able to give the organization beneficial business connections. According to Hill and Jones (2007, p.19), new owners of a business may bring about the much needed network in the business community.

The second benefit of equity financing as a source of capital is that there is no burden involved in management of credit facilities. It is worth noting that whenever an organization gets into debt, there is always need to have proper credit management, something which is not experienced with equity financing. The burden of extra cost incurred through payment of interest is not experienced with the use of equity financing.

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Disadvantages of equity financing

Equity financing is known to have various disadvantages to an organization. The first disadvantage is that the new investors will have to get part of the company’s profits. According to Neale and McElroy (2004, p.16), important to note that shareholders are usually motivated by the share of profit that they get from an investment. This means that the profit of an organization will end up being divided among the increased number of shareholders. The second disadvantage of going for equity financing is that the management of an organization becomes more divided.

Equity financing is known to divide the control in management of an organization (Debarrshi 2012, p. 98). With shared control of the business, decision making process becomes complicated. Finally, equity financing is disadvantageous in that unnecessary disagreements may arise. This becomes more complicated if some of the new shareholders are not team players.

  1. Retained profits financing

Retained profit is the other source of capital that Madison Plc can have. With retained profit as a source of capital, an organization usually ploughs back some of the earned profit. This means that instead of the profit being allocated for other purposes such as payment of dividends, the company uses it to carry out capital operations.

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Advantages of funding through retained profit

One advantage of financing the operations of a business through retained earnings is that the level of debt in the organization does not increase. With retained earnings, the business does not incur any cost such as interest on loans as is the case in debt financing. This means that an organization does not reduce its net profit as a result of financing expenses.

The second benefit of financing through retained earnings is that an organization maintains its independence. This means that the management of an organization is not diluted as a result of new investors in the shares of an organization. This means that the decision making process in the organization does not become complicated and unnecessarily long. Additionally, conflicts in the organization do not increase as would be the case with equity financing.

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Disadvantages of funding through retained profit

One disadvantage of using retained earnings as a source of capital is that it takes a long time before a considerable amount of money is ploughed back. It is worth noting that retained earnings reduce the speed with which an organization can grow through more investments. It is usually a very slow source of revenue. Secondly, retained earnings as a source of capital reduce the liquidity of an organization.

Using retained earnings to expand or have more investments means that cash for the business is reduced. This risks crippling other business commitments that require cash. Additionally, the use of retained earnings as a source of financing denies an organization an opportunity to gain from new members of the organization as is the case in equity financing.

Efficient working capital management in improving cash flow

It is worth noting that proper management of the working capital of an organization is very important (Gray, Salter & Radebaugh 2011, p. 34). This is because it contributes in shaping the well being of an organization. Madison Plc can do away with some of the non-current asset. Additionally, for proper management of the working capital of Madison Plc, long-term debt financing can be sought.

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Break-even analysis as a tool for decision making

Break-even analysis is a tool used in determining the level of operation in which an organization will be able to just cover its costs. At the break-even point of an organization, there is no loss or profit made from operations in place (Keller & Price 2013, p.56). Break-even point is usually indicated through showing that the income generated equals the total cost involved. For Madison Plc, break even analysis can be helpful in deciding which software to produce. This can be done through looking at the cost that would be covered by the returns.

Breakeven point= Sales = Variable Cost +Total Cost

Madison Super

Assuming that the fixed cost = $5,500

And variable cost = $2,015 per unit

The price per unit of output=$6,200

P × Q = Vc × Q + Fc

5,500*Q = 2015Q + 5,500

5,500 Q = 2,015Q + 5,500

5,500Q – 2015Q = 5,500

3,485Q = 5500

Q = 5,500 / 3,485

Q = 1.57 units

The BEP in units= 1.57 units

Break-even point in terms of money= (1.57 units) × ($5,500) = $8,635

Therefore, the breakeven point is at the point where the sales stand at $8,635.

Profit=Sales-Total cost

=Total cost=$7,515

=$8,635-7,515=1,120

Madison Platform:

Assuming that the fixed cost = $8,500

And variable cost = $1,847 per unit

The price per unit of output=$6200

P × Q = Vc × Q + Fc

6,200 *Q = 1847Q + 8,500

6200 Q = 1847 Q + 8,500

6200Q – 1847Q = 8,500

4,353Q = 8,500

Q = 8,500 / 4,353

Q = 1.95 units

The BEP in units= 1.95 units

Break-even point in terms of money= (1.95 units) × ($6,200)

= $12,090

Therefore, the breakeven point is at the point where the sales stand at $12,090.

Profit=$12,090-Total cost

Total cost=$10,347

=12,090-10,347=$1,743

Loss

From the break-even points of the two options, Madison Plc should invest in Madison Platform since profit at the break-even point is higher than that of Madison Super.

Other factors a firm may take into account when making investment decisions

Making of investment decisions are usually very sensitive for an organization. This is because they determine the future of an organization. Investment decisions should be done with care since any mistake may lead to poor performance of organization. The other factor that Madison Plc may take into consideration when making investment decisions is the payback period of each investment option.

The payback period of an investment refers to the duration that an investment will take before the initial capital used is recovered. Therefore, Madison Plc should go for investment options that have the shortest payback period. According to Boddy (2005, p.80), an investment that has a short payback period is the best for an organization. A short payback period of an investment means that in a short while, an organization will start enjoying profit without considering the capital employed.

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The other factor that Madison Plc should consider when making investment decisions is the accounting rate of return. According to Proctor (2012, p.21), rate of return refers to the amount an investment pays back to the organization with regard to the capital involved. It is important for Madison Plc to go for investments with the highest accounting rate of return.

Ratio analysis of Puteaux France and Melia Portfolio Research Spain for consideration by Madison Plc

Financial ratio analysis is a tool used in analyzing the performance of an organization. Financial ratios are usually useful in scrutinizing various aspects of a business. For the purpose of decision making regarding the company that Madison Plc should invest in, the profitability, liquidity and efficiency ratios of Puteaux digital France and Melia Portfolio Research Spain will be calculated.

  • Liquidity ratio

Liquidity ratio measures capability of an organization to handle short-term commitments through the use of its short-term assets (Hermanson& James 2012, p.16). Some of the liquidity ratios for two companies are as calculated below.

The current ratio

Current ratio = Current assets

                       Current liabilities

Puteaux digital France
 Short-term assetsLiabilities (short-term)Current Ratio
20113,8792,1841.78
20124,4571,4902.99
20138,3301,6934.92
Melia Portfolio Research Spain   Current Assets Current Liabilities Current Ratio 2011 3,879 9,834 0.39 2012 4,457 13,490 0.33 2013 8,330 17,687 0.47 

From the current ratios calculated above, Puteaux is seen to have the best relationship of current assets with current liabilities. The current assets are seen to cover the existing assets in more than 1 time. Under this ratio, Madison Plc should go for Puteaux digital France. According to Collier, (2009, p. 17), current ratio should not be too high.

Quick ratio

Acid test ratio = Current Assets – Stock

Current Liabilities

Puteaux digital France
 Current Assets – stockCurrent liabilitiesQuick Ratio
20113,8792,1841.78
20124,4571,4902.99
20138,3301,6934.92
Melia Portfolio Research  Spain
 Current Assets-stockCurrent LiabilitiesQuick Ratio
20113,8799,8340.39
20124,45713,4900.33
20138,33017,6870.47

From the quick ratios calculated above, Puteaux is seen to have the best relationship of current assets with current liabilities less stock as indicated by the quick ratio, which is more than 1. The current assets are seen to cover the current assets in more than 1 time without consideration of the inventory. Under this ratio, Madison Plc should invest inPuteaux digital France.

  • Profitability ratios

Net-profit margin

Net profit margin Net profit x 100

Sales

Puteaux digital France
 Net Profit before TaxSales%
20111,6589,40617.63
20122,19710,81220.32
20132,39511,51620.80
Melia Portfolio Research  Spain
 Net Profit  Sales%
2011-1,38715,529-8.93
2012-1,59517,849-8.94
2013-1,83320,516-8.93

Considering the net profit margin, Madison Plc should invest in Puteaux digital France. This is because it has a high net profit margin compared to Melia Portfolio Research Spain. A high net profit margin indicates that an organization has a higher growth capability than another one whose net profit margin is low.

Return on Capital Employed

This is a measure of the gain realized in comparison with the capital invested.

Return on capital employed=Operating profit x 100

Capital

Puteaux digital France
 Net Profit before TaxCapital%
20111,6587,87321.06
20122,19710,06921.82
20132,39512,46419.22
Melia Portfolio Research  Spain
 Net Profit before TaxCapital Employed%
2011-1,3874,910-28.25
2012-1,5953,315-48.11
2013-1,8331,482-123.68

The return on investment of the two companies shows that Puteaux has a better return. This means thatPuteaux has been able to realize more gain on the capital invested. Therefore, Madison Plc should invest inPuteaux digital France since it has a higher net profit margin than Melia Portfolio Research Spain.

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  • Efficiency ratios

Asset turnover ratio

Asset turnover ratio measures the extent to which an organization’s assets have been utilized.

The asset turnover ratio = Sales Revenue

 Net Assets

Puteaux digital France
 SalesNet assetsAsset  turnover ratio
20119,4067,8731.19
201210,81210,0691.07
201311,51612,4640.92
Melia Portfolio Research  Spain
 SalesNet assetsAsset  turnover ratio
201115,5294,9103.16
201217,8493,3155.38
201320,5161,48213.84

From the calculations above, Melia Portfolio Research Spain is seen to be having a higher asset turnover ratio. This means that Madison Plc should be interested in putting his money on Melia Portfolio Research Spain than Puteaux digital France.

Upon analysis of the several ratios for two companies, most ratios are in favor of Puteaux digital France. Therefore, Madison Plc should confidently go for Puteaux digital France as the best investment option.

Recommendations

It is always important for organizations to ensure that actions that are fundamental in performance improvement are done in the earliest time possible. Therefore, it is significant for the management of Madison Plc to guarantee that all what is required for the purpose of making the investment plans successful is done early enough. Firstly, the management of this company should ensure that the source of financing for new investment is identified as soon as possible.

With several sources of finances being in place, it is reasonable to go for the option that gives the organization optimal results. Additionally, the company should look for the option that upholds the independence of the company. With this in mind, Madison Plc should go for debt financing as the source of finance for its projects.

Working capital management is a very fundamental aspect in business. Madison Plc should ensure that there is proper management of working capital for the purpose of creating sustainability of the current position of the organization. It is important for the company to guarantee that the best ways of improving the working capital of the organization are employed. Disposal of some long term assets should be done on time to create better current health in the organization.

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Conclusion

From the ratio analysis, it is evident that the company has been able to have a good performance. This means that ratio analysis should be carried out regularly to ensure that the various aspects of Madison Plc are understood well. Madison Plc should also ensure that proper working capital management takes place. This is important since it safeguards that the company improves its current health. Madison Plc should certify that there is good choice of investments.

According to Angwin (2007, p.46), investment decisions should always be made in such a way that encourages good performance and optimal performance. To succeed in making good investment decisions, the organization should use the available investment analysis tools. With this done, it will be possible to make all decisions regarding investments.

In terms of financing, the company should ensure that it goes for debt financing. This is good for this company since it will guarantee that there is independence in management. Additionally, debt financing will increase the value of retained earnings for the company.

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