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ABSTRACT
The report has been used to evaluate the management of finances and its importance in decision
making.
It has been divided in two parts- Investment Appraisal 1 and Investment Appraisal 2. For the case
study, the financial management of Danone has been evaluated. Sources of finances available
for Danone, their implications and selecting the optimal mix for the venture are discussed in Task
1.
Task 2 deals with the implications and cost associated with different sources of finance.
Importance of financial planning, information needs of different decision makers and their
impact on financial statements are also evaluated and analyzed. Additionally budgeting and its
importance have been conversed as well. A cash budget has been analyzed taking into
consideration the operations of the company. Furthermore the concept of unit costing has also
been analyzed, to understand it with clarity a hypothetical example has been stated which
explains the various data point related to costing. Financial statements, their different formats
and interpretation through ratios and comparisons are also included in this segment. Besides this
the financial performance of Danone has been investigated with the help of ratio analysis tool.
The various investment appraisal tools have also been examined with the help of various
hypothetical examples. Apart from the theory part, respective varied numerical are further solved
and analyzed for practical familiarity with the concepts.
Contents
ABSTRACT....................................................................................................................................3
Investment Appraisal Part 1.............................................................................................................5
A) Sources of Funds and its Associated Costs (LO 1.1 & 2.1)...................................................5
B) Implications of the Sources of Finance Identified for Danone (LO 1.2)................................7
Investment Appraisal Part 2.............................................................................................................8
A) Importance of Financial Planning & Information Needs of Different Decision Makers (LO
2.2 & 2.3).....................................................................................................................................9
B) Selection of Appropriate Source for Danone (LO 1.3).........................................................10
C) Impact of Financial Statements (LO 2.4)..............................................................................11
D) Main Financial Statements & its Formats for Different Business Types (LO 4.1 & 4.2)....12
E) Financial Statement Analysis (LO 4.3).................................................................................16
F) Budget and Unit costing (LO 3.1 & 3.2)...............................................................................18
G) Investment Appraisal Techniques (LO 3.3)..........................................................................20
Conclusion.................................................................................................................................22
References......................................................................................................................................23
On the contrary external sources of funds are raised from outside lenders and investors in form of
shares, loans, hire purchase or leasing. Internal sources of finance are easily available, safe and
reliable as well. However the major setback of this source is that in case of failure of the venture,
the complete capital is lost. Excess dependence on internal finance can also dissatisfy the
shareholders as they would be deprived from dividends (Porter and Norton, 2010). Alternatively
external sources of funds diversifies this risk and helps a firm to preserve its internal funds.
However the foremost disadvantage of this resource is it increases the interference of the lenders
in case of loans from banks, venture capitalist or even from the equity shareowners as investing
their money in the business gives them right to take interest in the operations of the firm.
Additionally it also increases the burden to repay money on time along with regular interest
payments (Brigham and Houston, 2009).
External Sources of Finance
shareholders have no voting rights in the firm. However Preference shareholders enjoy priority
6
towards payment of dividend and repayment of principal amount over the equity shareholders
(Mohana, 2011).
Hence it can be observed that every category of funds have its own set of prons/cons. It is very
important for the company to weigh all kinds of outlook in a particular circumstance before
choosing a specific source or mix a of finance. The firm needs to analyse the cost vis a vis the
cost bearing capability of the firm before taking the ultimate decision. The following diagram
depicts the respective cost attached to the sources of funds recommended for Danone.
Implication and Cost of the Source of Finance
Dividends to be paid
Capital gains anticipated by the investors
Equity
and
Preferenc
e Shares
Retain
ed
Earnin
gs
Bank
Borro
wings
decision makers both internal and external who take keen interest in the financial position of the
firm. The management team for instance is more interested in the operational efficiency of the
firm, they need information to formulate effective plans and policies. The data is also used the
management to forecast sales, profits and other critical financial indicators for the coming years.
It supports the management to make a comparative study of the firm with its peers (Drake and
Fabozzi, 2012). Employees are often worried about the profit generating ability of the firm so
that they can be relieved about the concerns related to timely payment of salary/bonus on time.
Shareholders who invest in the firm need information about the current position and future
soundness of the company. They are real owners of the firm having considerable stake in the
business hence they are concerned about the safety of their funds, its return and utilization of the
funds. Creditors having invested their money are concerned about the debt paying ability and
credibility of the firm so that they get can higher returns on time. Government and consumers are
also distant decision makers (Kramer, 2009). State need data about the tax default history if any
and basic data to create national statistics. Consumers on the other hand enquire about the
products, their quality and price so that they get maximum value for money spent on buying the
products (Mayo, 2011). Thus it can be observed that every decision makers have substantial
interest in a company and it is the duty of the management to take care of these stakeholders in
order to strengthen its position in the industry.
B) Selection of Appropriate Source for Danone (LO 1.3)
Danone has been a market leader in dairy product. As per companys top management in 2014
despite of political and economic unrests it had met its targets. The company has the resources
and structure to face the global challenges. The firm aims extend its presence in high growth
markets such as Asia & Africa (Danone, 2015). As per BloombergBusiness (2014), Danone
announced to aqcuire 40% stake in Brookside Dairy Ltd. located in Kenya to expand its
footprints in Africa on July 2014. The deal value of the transaction has not been disclosed by any
of the companies. This strategy will enable the firm to grow its business in the new region with a
strong control. Thus this acquisition will evade the company from the troubles of setting up new
business along with the legal, political and regional hassles. However huge amount of funds
would be required to materialize the deal successfully.
10
The above table shows that there has been rise in firms share capital by 19.6%. Additionally the
retained earnings have also increased by 6%. Non current financial debt which normally includes
long-term borrowing, bonds payable and long-term lease obligations has decreased by 6.6%.It
can be observed that the firm has high retained earnings and as per company reports the company
uses this funds to pay dividends to its shareholders. To make payment for transaction value to
Brookside Dairy, the firm can opt for a mix of own capital and debt capital. As only 40% of the
shares are acquired in a relatively small firm, it can be assumed that the deal amount will not be
huge. Loans can be easily raised from bank as Danone is a public company and a relaible name
to bank upon. However issuing of shares for a small amount will be time consuming and a
cumbersome process. 30% of retained earnings and 70% of long term loans will suffice the
financing of the deal value. It would be wise to place less proportion of retained earning in the
funding breakup as though own funds are safe but it is risky to put a major amount in a new
venture as any kind of setback can block the funds. To diversify this risk, long term loans should
be used to fund the deal value. They put additional burden of regualar payment of interest on the
firm however Danone is financially sound company hence quite capable to pay its dues on time.
C) Impact of Financial Statements (LO 2.4)
Retained Earnings/Own Capital
Impact on Balance Sheet: The funding made from retained earnings ( 11,817 mn) to purchase
40% holding in Brookside Dairy will decrease the balance of retained earnings and consolidated
equity as well.
Impact on Income Statement: This transaction will have not effect on the income statement of
the company.
Non Current Financial Debt/Borrowed Funds
Impact on Balance Sheet: Raising of long term loans will increase the non current financial
debt balance of (6,598 mn) the company. Additionally it will also increase cash balance on the
current asset side.
Impact on Income Statement:Interest which is paid on loan derived from banks would be
treated as interest expense and will be deducted from operating income to calculate net income.
11
Interest paid on lease liability will be treated as interest expense and depreciation charged on the
equipment on lease will be stated as depreciation expense on the P/L a/c
Impact on Cash Flow Statement: Loan from banks will be depicted under head Cash Flow
from Financing Activities and interest on loans will be shown as cash outflow under the same
head.
D)Main Financial Statements & its Formats for Different Business Types (LO 4.1 & 4.2)
Financial statements are vital documents for any business type. If studied and reported correctly
it provides plentiful information about the companys financial health. It can be used as a key
tool to gauge the financial soundness of the firm. However only number reflected on the
statement will be of no use unless financial analysis is conducted (Drake and Fabozzi, 2012).
Thus with skillful financial analysis stakeholders can extract highly helpful and meaningful
information about the present and past performance of the firm.
Balance Sheet: It depicts the assets owned and liabilities owed by the firm on a specific date. It
is prepared as on particular date usually on financial year end of the firm. It is prepared on two
formats-Horizontal and Vertical. Vertical formal lists Assets on the left side and Liabilities on the
right side of the table. Horizontal format starts with assets and followed by liabilities just below
it. Data displayed on the balance sheet gives very useful information for analysis (Drake and
Fabozzi, 2012).
Format of a Balance Sheet (Vertical Format)
12
13
14
15
2013
0.74
Current Asset-Inventory/Current
Liability
Gross Proft/Net Sales
Net Proft/Net Sale
EBIT/Capital Employed
ROCE
2014
0.70
0.62
0.57
48.46
47.71
%
%
7.28% 5.93%
14.95
13.45
%
%
0.66
0.56
0.40
0.36
11.77
11.13
8.77
8.25
P/E Ratio
2
1.46
2
8.65
has dropped marginally in 2014. Debt equity ratio measures the companys dependency of on
outsiders firm compared to shareholders firm for its existence. Acceptable ratio is 2:1 i.e.
shareholders fund should be at least half of outsiders fund (Drake and Fabozzi, 2012). In
Danones case the debt equity ratio is low which depicts that higher protection felt by its lenders.
Debt to total capital ratio indicates financial leverage of the firm. It measures what portion of
permanent capital consists of long term debt (Kramer, 2009). The financials of Danone indicates
that in 2013 the 40% of the companys capital structure consisted of debt and in 2014 it is 36%.
This is a positive sign. Debtors turnover ratio illustrates how fast receivables are collected and
inventory turnover ratio shows how fast the inventory is generating sales (Drake and Fabozzi,
2012). For Danone the ratios have been same in both the years and are not irregular. The P/E
ratio measures investors confidence in the firm and how much the stakeholder is ready to pay
for each Euro of earnings. This ratio has shown significant rise in 2014 which reveals popularity
of the company in market and that the investors have assurance in the firms output.
Danone Dividend Chart (2000-2014)
17
July
August
Septembe
r
7,550.00
5,425.00
4,700.00
2,500.0
0
(1,300.0
0)
(2,730.0
0)
Cash Sales
4,875.00
6,025.00
7,500.00
7,800.0
0
8,400.00
9,600.00
Credit Sales
2,850.00
3,300.00
3,600.00
4,000.0
0
4,800.00
5,200.00
Total Receipts
Payments
7,725.00
9,325.00
11,100.0
0
11,800.
00
13,200.0
0
14,800.0
0
5,800.00
5,600.0
0
6,000.00
6,500.00
3,600.00
4,200.0
0
4,500.00
4,500.00
1,700.00
1,600.0
0
1,930.00
2,000.00
Particulars
Raw Materials
Direct production
expenses
4,050.00
3,250.00
Production overheads
1,550.00
Advertising
1,000.00
4,900.00
3,650.00
1,500.00
October
Novembe
r
Decembe
r
2,000.00
2,200.00
2,200.00
2,200.00
Total Payments
9,850.00
10,050.0
0
13,300.0
0
15,600.
00
14,630.0
0
13,000.0
0
Closing Balance
5,425.00
4,700.00
2,500.00
(1,300.
00)
(2,730.0
0)
(930.00)
The above cash budget is a statement from July to December. It can be observed that the closing
cash balance s gradually decreasing from July. Cash deficit can be observed in the months Oct,
Nov and Dec. To decrease the same the firm can tighten its credit sales policies for these months.
Additionally it can also ask its lenders to ease its payment cycle for this specific period without
hampering its goodwill in the market. Furthermore advertisement expense in the month of Oct
can be postponed or minimized to the extent which can avoid deficiency. It can be seen that
Danone had purchased a machinery, the payment of which is processed in three installments
from Sep to Nov. This is an additional cost apart from the regular expenses. The company can
reduce the installments amount or after thorough contemplation if the purchasing can be
postponed to next calendar year, the cash deficiency can be reduced.
Unit costing is a method of costing applied to ascertain the cost per unit of production where
standard products are manufactured. This costing technique is used where production is
continued and uniform. The units of production is identical and cost units are physical
(Horngren, 2012). The following table illustrates cost calculation of Danone Units manufactured
in a hypothetical situation. It is assumed that 16000 units were manufactured out of which 13500
units could be sold @ GBP 9 per unit. The table below shows the other cost calculation and
profit per unit.
19
Particulars
Total Cost
Raw Materials
60,000.00
3.75
Direct Wages
16,890.00
1.06
Prime Cost
Work Overheads (Factory
Expenses)
76,890.00
4.81
6,000.00
0.38
Office Overheads
16,500.00
1.03
Cost of Production
Total Units Sold: 13500 Units
99,390.00
6.21
Cost of Production
83,835.00
6.21
Selling Overhead
3,400.00
0.25
Cost of Sales
87,235.00
6.46
Profit
34,265.00
2.54
121,500.00
9.00
20
Cost Per
Unit
Project
B
55,000.0
0
25,000.
00
15,000.
00
30,000.
00
20,000.
00
15,000.
00
30,000.
00
20,000.
00
16,000.
00
10,000.
00
10,000.
00
Units: GBP
Initial
Investment
Cash Flows
4
Resale Value
by end of
year 4
Cost of
Capital
NPV
10%
10%
72,450.6
5
63,632.9
5
21
Investment
of
Project
A:
(Initial
investment
Resale
value/2),
of
Project
B:
(Initial
investment
Resale
value/2),
(65000+10000)/2=37,500
Average
Investment
(55000+10000)/2=32,500
Accounting Rate of Return A=9500/37500=28%
Accounting Rate of Return B=9250/32500=25%
Thus in this situation Danone should select Project A as it is generating higher average return.
Payback Period of Project A= 2years +(65-55)/15=2.66 Years
Payback Period of Project B=2 years + (55-35)/30= 2.66 Years.
Thus as per payback period method in both the project initial investment would be covered in
2.66 years.
NPV is present value of future cash inflows (taking the discounted values at cost of capital of
10% i.e PVIF @ 10% for 1st, 2nd, 3rd and 4th year) minus initial investment. NPV of project A
is GBP 72,450.65 and project B is GBP 63,632.95. Both the projects have NPV>0, however
project A has higher NPV. Thus Project A should be selected.
22
As per all the appraisal techniques Project A seems to be a more viable venture.
Conclusion
The above report reflects that Danone is managing its financials effectively. The case examples
explained about cash budget, investment appraisal and units costing is illustrated to enable the
management to understand its usefulness with respect to Danone.
ThankingYou
XYZ
References
BloombergBusiness (2014) Danone Buys 40% of Kenyas Brookside to Expand African
Footprint , 18 July, [Online], Available: http://www.bloomberg.com/news/articles/2014-0718/danone-buys-40-of-kenya-s-brookside-to-expand-african-footprint [2015].
Bragg, S.M. (2012) Business Ratios and Formulas: A Comprehensive Guide, New Jersey: John
Wiley & Sons.
Brigham, E.F. and Ehrhardt, M.C. (2011) Financial Management: Theory and Practice, New
York: Cengage Learning.
Brigham, E.F. and Houston, J.F. (2009) Fundamentals of Financial Management, NewYork:
Cengage Learning.
Danone
(2015)
2014
Registration
Document,
[Online],
Available:
http://finance.danone.com/phoenix.zhtml?c=95168&p=irol-landing_annualreport [2015].
23
Drake, P.P. and Fabozzi, F.J. (2012) Analysis of Financial Statements, New Jersey: John Wiley &
Sons.
Horngren, C.T. (2012) Cost Accounting: A Managerial Emphasis, 13/e, New Delhi: Pearson
Education India.
Kramer (2009) Financial Statements Demystified, New Delhi: Tata McGraw-Hill Education.
Mayo, H. (2011) Basic Finance: An Introduction to Financial Institutions, Investments and
Management, New York: Cengage Learning.
McLaney, E.J. and Atrill, P. (2010) Accounting: An Introduction, Essex: Pearson Education
Limited.
Mohana, R.P. (2011) Financial Statement Analysis and Reporting, New Delhi: PHI Learning Pvt.
Ltd.
Porter, G. and Norton, C. (2010) Financial Accounting: The Impact on Decision Makers, New
York: Cengage Learning.
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