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Finance For Strategic Managers

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Introduction

Finance for Strategic Managers plays an important role as most of the businesses require formulation of various strategies and decisions on the type of financial data and information available with the company. Such managers, then, analyse and interpret various data so as to conduct resource planning and forecasting so as to achieve their overall short-term and long-term objectives (Alkaraan, 2015). This report aims to provide a detailed account on Samsung PLC in regards to the types of methodologies undertaken by it for the purpose of strategic planning, appraisal of capital investment projects as well as financial data required for the same.

The entire report is bifurcated into various tasks which provides supporting evidence for the members of Chamber of Commerce who want to research and study the success of Samsung PLC. For this purpose, this report aims to provide a presentation, information leaflet, discussion paper and practical application of capital expenditure appraisal methods in a comprehensive manner.

Task 1

Interpretation of Samsung PLC Financial Statements to assess its current viability

Financial Statements help in providing relevant information to not only the management of the business but also to other internal as well as external stakeholders. This is due to the fact that they include all the financial data in a predefined format that facilitates easy identification of the company's health in terms of corporate performance and profitability.

In the context of Samsung PLC, the company creates quarter-wise reports along with a full year report so as to brief their stakeholders in a continuous manner (Annual Report, 2018). For this purpose, however, the following financial statements, related to full year, have been analysed so as to determine its current viability:

  • Statement of Cash Flows:

As per this statement, Samsung PLC reports its net cash-flow generated from Operating, Investing and Financing activities in both South Korean Won (KRW) as well as U.S. Dollar (USD). The balance of cash and cash equivalents at the beginning of 2018 is reported as $27,763,038 whereas at the end of the period, this amount reduced to $27,577,050. Even though the Net Cash inflow from operating activities did increase from $56,500,238 in 2017 to $60,926,509 in 2018, there has been an increased outflow in terms of investing by $2,595,178 and financing activities by $2,298,978. Thus, indicating the impact of overall decrease in the cash and cash equivalents for 2018 by $185,988.

  • Statement of Profits or Loss:

In the context of Samsung PLC, the net profit for 2018 accounted an increase of $1,961,546 (=$40,305,867−$38,344,321)from 2017. Thus, indicating a net increase in the overall profits of the company by 5.12%. For a company as big as Samsung PLC, a 5% increase in its annual profit shows that the financial health of the business is quite strong (Appuhami, 2017). The Earning Per share (Basic) also increased from 5.45 in 2017 to 5.87 in 2018. Thus, indicating a net increase of 7.71% which is attractive for from stakeholders' perspective.

  • Statement of Financial Position:

As per this statement, Samsung PLC reports its net cash-flow generated from Operating, Investing and Financing activities in both South Korean Won (KRW) as well as U.S. Dollar (USD). The balance of total assets increased by 12.46% whereas the total liabilities and equity rose by 4.98% and 15.51% respectively. Thus, indicating that the investor's belief in the company has grown stronger which has resulted in an infusion of capital in the business in 2018.

Comparative analysis of Financial Data related to Samsung PLC

In order to conduct comparative analysis of financial data related to Samsung PLC, the ratio analysis has been carried out for the years 2018 and 2017 in the following manner:

Liquidity Ratios:

Particulars

2018

2017

Current Assets

158785744

133595101

Current Liabilities

62789472

61056713

Current Ratio

2.53

2.19

 

Profitability Ratios:

Particulars

2018

2017

Gross Profit for the year

101232635

100239833

Net Revenue for the year

221568382

217754524

Gross Profit Ratio

45.69%

46.03%

 

Particulars

2018

2017

Net Profit for the year

40305867

38344321

Net Revenue for the year

221568382

217754524

Net Profit Ratio

18.19%

17.61%

 

Leverage Ratios:

Particulars

2018

2017

Total Debt

83260643

79312842

Total Equity

225187480

194955256

Debt-Equity Ratio

36.97%

40.68%

Recommendations

Based on the comparative analysis as well as interpretation of the financial data furnished by Samsung PLC's final reports, the following recommendations have been provisioned:

  • The company needs to reduce its current ratio which is quite high. Ideally a current ratio of 2:1 is maintained. If the company's current ratio goes on increase it may result in creating problems in terms of resource allocation from a long-term perspective (Basak and Makarov, 2014).
  • Samsung needs to increase its revenue while ensuring that its cost of sales is reduced simultaneously. Currently, the business incurred 1.75% increase in cost of sales on a 0.99% increase in revenue.

Task 3

Capital Expenditure Appraisal

Scenario 1:

Current Machinery

Particulars

Year 0 (£)

Year 1 (£)

Year 2 (£)

Year 3 (£)

Initial Cost Outlay

260000

-

-

-

Less: Savings

-120000

-

-

-

Net Cash Out-flow

140000

-

-

-

 

 

 

 

 

Cash Inflows

 

 

 

 

Revenue

 

450000

250000

150000

Less:

 

 

 

 

Direct Materials

 

-162000

-94500

-59535

Direct Labour

 

-67500

-39375

-24806.25

Variable Overheads

 

-40500

-22500

-13500

Depreciation

 

-31500

-17500

-10500

Repair and Maintenance Costs

 

-7000

-7000

-7000

Net Cash Inflow

 

141500

69125

34658.75

Present Value of Cash Flows

-140000

123043.48

52268.43

22788.69

Net Present Value

 

 

 

58100.60

 

 

 

 

 

Scenario 2:

 

New Machinery

Particulars

Year 0 (£)

Year 1 (£)

Year 2 (£)

Year 3 (£)

Initial Cost Outlay

220000

-

-

-

Less: Residual Value

-75000

-

-

-

Net Cash Out-flow

145000

-

-

-

 

 

 

 

 

Cash Inflows

 

 

 

 

Revenue

 

450000

250000

150000

Less:

 

 

 

 

Direct Materials

 

-162000

-94500

-59535

Direct Labour

 

-54000

-31500

-19845

Variable Overheads

 

-27000

-15000

-9000

Depreciation

 

-49500

-27500

-16500

Repair and Maintenance Costs

 

-1000

-1000

-1000

Net Cash Inflow

 

156500

80500

44120

Present Value of Cash Flows

-145000

136086.96

60869.57

29009.62

Net Present Value

 

 

 

80966.14

Assumptions:

 

  1. Company's Cost of Capital of 15% is taken as the discount rate so as to achieve the net present values of future cash flows in both scenarios.
  2. Expected Demand (in Units) has been assumed to be sold without any closing inventory.

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In the context of given scenario, the most suitable capital expenditure appraisal method is Net Present Value as it helps in the determination of present values of net cash flows that are expected to be in incurred in forthcoming years (Bergh, D. D. and et.al., 2014). Since the management wants to ascertain whether or not they should purchase or replace the machinery, this method would help them in getting a comprehensive breakdown of costs as well as revenue. Comparing the two scenarios, it is strongly recommended that the management should immediately purchase the new machinery. The main reason to suggest this solution is that:

  • Repair and Maintenance costs are substantially minimised;
  • Savings provide a tax-shield for the company;
  • NPV for the new machinery worth £80,996.14 is significantly higher than the NPV ascertained for the current machinery worth £58,100.60 (Chatterji and et.al., 2016).

Conclusion

From the given report it can be concluded that finance plays an imperative role in the process of strategic planning. Thus, enabling strategic managers of various organisations to ensure that their business is in complete alignment with the internal as well as external environment. Along with this, it is also observed that financial data and information plays a crucial role in ascertaining how the business strategy relating to a particular department or organisation as a whole. This enables the company to ensure that the strategic direction undertaken by the business is correct or not for its overall success in the forthcoming years.

Appendices

Capital Expenditure Appraisal

Working Notes:

  1. Determination of Direct Material and Labour Costs with a growth of 5%

Current Machinery

Particulars

Year 1

Year 2

Year 3

Direct Materials

1.8

1.89

1.9845

Direct Labour

0.75

0.7875

0.826875

New Machinery

Particulars

Year 1

Year 2

Year 3

Direct Materials

1.8

1.89

1.9845

Direct Labour

0.6

0.63

0.6615

 

  1. Demand (in Units)

Expected Company Demand (in units)

Year

Units

1

90000

2

50000

3

30000

 

References

  • Alkaraan, F., 2015. Strategic Investment Decision-Making Perspectives', Advances in Mergers and Acquisitions (Advances in Mergers & Acquisitions, Volume 14).
  • Appuhami, R., 2017. Exploring the relationship between strategic performance measurement systems and managers' creativity: the mediating role of psychological empowerment and organisational learning. Accounting & Finance.
  • Basak, S. and Makarov, D., 2014. Strategic asset allocation in money management. The Journal of Finance. 69(1). pp.179-217.
  • Bergh, D. D. and et.al., 2014. Signalling theory and equilibrium in strategic management research: An assessment and a research agenda. Journal of Management Studies. 51(8). pp.1334-1360.
  • Chatterji, A. K. and et.al., 2016. Do ratings of firms converge? Implications for managers, investors and strategy researchers. Strategic Management Journal. 37(8). pp.1597-1614.
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