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Its managing director who receives an annual salary of$120,000 dominates the company. This is $40,000 more than the averagesalary received by managing directors of similar companies. Corporate tax is at the rate of 20% per year in the South Americancountry and 35% per year in the UK.
If in the future cash flows become uncertain, the company may want to reconsider the use of currency options. A managed floating exchange rate will be mainly influenced by themarket supply and demand for a currency, but is also subject tointervention by the relevant government. The government will buy or sellthe currency in order to influence the exchange rate, often to keep itwithin a desired range against the dollar or other key currency. This could leadto volatility in foreign exchange rates, which might be a deterrent toforeign trade. However, the figures above suggest that the project is notwealth-creating for Sludgewater’s shareholders, because the value of theexpected saving in fines ($1.72 million) is below the expected cost ofthe project ($2.756 million). The difficulty is that this conclusion isdependent on the current size of the fines payable, and if they were torise substantially, then the optimal choice (in financial terms) mightchange.
Exchange Rates
(b)Calculate the cash operating cycle of Cloud Co for the years ending 30 April 20X0 and 20X1. (2)At the beginning of the year to30 April 20X1 the company bought some new manufacturing equipment andrecruited six more sales staff. (c)What financial and non-financial criteria will need to be considered when deciding whether the investment should be made. (b)Outline the main limitations of using expected values when making investment decisions. Sludgewater, a furniture manufacturer, has been reported to theanti-pollution authorities on several occasions in recent years, andfined substantial amounts for making excessive toxic discharges into theair.
- Issue costs would probably be larger than the arrangement costs on the debt finance.
- Forward exchange contracts are the most frequently used method ofhedging.
- Managers must decide whether the ‘improvement in corporate image’and the advancement in technology are worth the initial costs – asubjective assessment.
- The machine is currently being used elsewhere in thebusiness where it generates a present value of $20,000; it has a scrapvalue of $12,000.
- Governments or commercial agencies in multinationals’ home countries often offer insurance against political risk.
The directors should,however, be prepared to increase the offer to maximum price. The earnings based valuation indicates a value of around $2.5million, which is based on the assumption, that not only will thecurrent earnings be maintained, but that they will increase by thesavings in the director’s remuneration. (iv)A faster rate of corporategrowth might be achieved by a policy of retaining a high level ofearnings (although corporate growth may also be achieved throughacquisitions and external financing). Issue costs would probably be larger than the arrangement costs on the debt finance. Debt finance is relatively cheap particularly if the company is ina position to offset the interest charge against taxable profits. Security
Investors will want to take a charge over the assets of thecompany as security for the loan.
Terminal Cash Flow
For example, if the Australian dollar strengthened againstthe US dollar, the reported value of the subsidiary would decrease. By optimising the amount of funds to transfer, the Baumol modelminimises the opportunity cost of holding cash in the current account,thereby reducing the costs of cash management. Here, inventory days have increased from 43 days to 66 days, whileinventory has increased by 132% compared to the 47% increase inturnover.
Specialist advisors are used to determine the issue price andunderwriting fees may be high. This method enables a company to access awider market for funds but they may not have the in house expertise toadminister the process and the issue costs may be prohibitively high fora relatively small issue of shares. If a country experiences high levels of demand pull inflation thenone way of seeking bookkeeping for startups to control this problem is to raise short terminterest rates. This has the effect of reducing the money supply andhence the demand for goods and services. If this happens the level ofimports is likely to fall, but also, as the economy slows down, thegovernment tax revenues will fall. The advantage of options is that they eliminate downside risk butallow participation in the upside.
Cross Rate Quotations
Semi skilled labour is paid at $6 per hour but is currentlyfully occupied on other projects. Due to union restrictions, staff willnot work overtime and there is no other labour available at such shortnotice. Therefore the only way to get the required hours is to movestaff from other production.
For example, if our gross investment is $800 and the salvage value when we go to dispose of these assets is 10 percent (that is, we can obtain 10 percent of our original paying price), our expected salvage value would be $80. To obtain the total life of the assets, we add the average life of the assets to their remaining life. The
recovery of the NWC occurs in Year 5, along with the aftertax salvage value. If you are applying for FLR(M) and are exempt from meeting the income requirement, or are using a third party’s income because of exceptional circumstances, you might be able to apply for a fee waiver. This is for people who cannot afford the Home Office application fee and are applying based on their human rights.
(b)A major refurbishment of apublicly funded hospital could be financed from increased taxation orreduced spending on other areas of government activity, or by increasinggovernment borrowing. (a)A country’s balance of paymentsis the balance between its total imports and total exports. The levelsof imports and exports include both visibles (goods) and ‘invisibles'(services and movements of funds).
It is therefore suggested that the market researchis thoroughly reviewed to ensure the reasonableness of the conclusionsdrawn. (c)On purely non-financialcriteria, it can be argued that Sludgewater has a moral and communityresponsibility to install anti-pollution equipment as long as the costof installation does not jeopardise the long-term survival of thecompany. In investment decisions,probability may often be used in relation to sales forecasts derivedfrom market research. The subjectivity involved in setting probabilitiesmeans that the judgements may be incorrect, even though the Net PresentValue for the investment may be highly sensitive to changes in theprobability distribution. It is certainly very unlikely that there will be the opportunityto repeat the investment many times. As the standard model has the highest equivalent annual cash flow, it is recommended that this machine be purchased.