Agency Theory Dividend Policy And Corporate Finance Finance Essay

The Gross Profit Ratio tells us the net income of a concern makes on its cost of gross revenues or cost of good sold. The public presentation was better in 2006, as it was 28.05 % . The per centum decreased 5.37 % in 2007 which is non good as they have less net income for their activities that take topographic point in the service. But 2008 public presentation was once more better, as it was 24.32 % .

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Reason

The Gross Profit Margin shows how good the concern is pull offing its purchase of stock. If it is high figure it shows that the concern is making good as it is commanding the cost of its purchases. The negative facet about this ratio is that it provides figures that may misdirect Spectrum e.g. if Spectrum do non cognize the difference between net and gross net income border as many people get assorted with these two figures. I have used this ratio for Spectrum and I found out that their Gross Profit Margin for 2006 was 28.05 % , in 2007 it was 22.68 % and in 2008 it was 24.32 % . By looking at their Gross Profit Margin, I found out their Gross Net income Margin decreased bye 5.37 % , which means that the public presentation of Spectrum has gone down. In 2006 Spectrum ‘s gross revenues figure was & A ; lb ; 21,015 and in 2007 their gross revenues figure was & A ; lb ; 27,450. This means that the gross revenues are non the ground of why their Gross Net income Ratio has decreased, as you can see that their gross revenues have increased from & A ; lb ; 6,435. The ground why their Gross Net income ratio figure has decreased in 2007 is because in 2006 their cost of gross revenues was & A ; lb ; 15,120 and in 2007 it was & A ; lb ; 21,225 which means that the cost of gross revenues has increased pass & A ; lb ; 6,105.

This ratio can better Spectrum Gross Profit border by increasing the gross revenues gross and Spectrum can make this by selling every bit much as possible. Spectrum could publicize more in order to do more gross revenues. By looking at their Gross Profit Margin, I found out their Gross Net income Margin has increased by 1.64 % , which means that the public presentation of Spectrum has gone up. The ground why their Gross Net income ratio figure has increased in 2008 is because in 2007 their cost of gross revenues was & A ; lb ; 21,225 and in 2008 it was & A ; lb ; 16,575 which means that the cost of gross revenues has decreased by & A ; lb ; 4,650, and the chief ground why cost of sale of Spectrum was less as comparison with 2007 merely because in 2008 they had cheap stuff. Material cost was decreased by 19.77 % in 2008. Appendix 1

Net Net income Margin

2006: 8.72 %

2007: 8.09 %

2008: 10.85 %

Explanation

In 2007, the concern was profitable but the net income fell compared to the old twelvemonth it was 8.09 % . Their disbursals have increased due to the difference. The managers have taken a larger salary, but 2008 public presentation was once more better, the net income up every bit compared to old twelvemonth it was 10.85 % .

Reason

Net Net income Margin provides information on the relationship between the net net incomes, which is the net income when all the disbursals have been subtracted ( gross net income – disbursals ) and the gross revenues gross has been made by Spectrum. I have used this ratio for Spectrum and I have found out that in 2006 their Net Net income Margin was 8.72 % and in 2007 it was 8.09 % . This tells me that the public presentation of Spectrum has gone down every bit compared to 2006. Spectrum ‘s Net Net income has fallen down by 0.63 % from 2006 to 2007. Again Spectrum ‘s gross revenues figure is non the ground of why their Internet Net income Margin ratio figure has decreased. The ground why their Internet Net income Margin ratio has decreased in 2007 is because their Net Net income has decreased as in 2006 their new Net income was & A ; lb ; 552 and whereas in 2007 it was & A ; lb ; 836. This tells me that Spectrum ‘s disbursals have increased. This is the ground why their Net income Margin ratio has decreased in 2007.

By diminishing some of the disbursals Spectrum can increase their Net income back up and this can do their hard currency flow healthier. This ratio can better Spectrum Net Profit Margin by raising the gross revenues gross and by selling more. Spectrum will besides necessitate to guarantee that they are maintaining their sundries disbursals, public-service corporation measures and drawings are kept minimal. So that they can salvage money and can pass on of import things such as stock. They can besides better their gross and net net income by advertisement more but they need to do certain that they are non passing to much money on advertisement. Spectrum can make this by publicizing where their market audience is.

Net net income Margin ratio has increased in 2008 is because their cyberspace net income has increased as in 2008 their new net income was & A ; lb ; 994 and whereas in 2007 it was & A ; lb ; 836, this tells me that Spectrum ‘s disbursals have decreased. This is the ground why their net income border ratio has increased in 2008. Appendix 1

ROCE ( Return On Capital Employed )

2006: 21.24 %

2007: 28.45 %

2008: 40.44 %

Explanation

ROCE is a ratio that indicates the efficiency and profitableness of a company ‘s capital investings. This is good as the return on capital employed has increased in 2007 and 2008, which is good for concern as it is better. ROCE is refers to payments back to capital proprietors of a concern. So if the figure increases it means that the concern is acquiring their payments on clip which is good for the concern. Appendix 1

Leverage Ratio

Explanation

A Leverage Ratio step ‘s a company ‘s ability to run into its fiscal committednesss and its funding methods ( debt or equity ) . It is an of import step to see because an investor can calculate out where their invested money is traveling and how much of it will be reinvested to make a return.

Reason

The debt to assets ratio measures the per centum of assets that are financed by debt. It besides measures the sum of hazard a company is taking in instance of a debt-load. In this instance, approximately 47.14 % of assets are being finance by debt, which is good when compared to old old ages 2006 was 63.12 % and 2007 was 62.80 % . The company is trusting less on debt and hence paying less involvement out to 3rd parties. The debt to equity ratio measures the proportion of assets that are being financed by debt and equity. Once once more the per centums have been diminishing from 171.17 % in 2006 to 90.14 % in 2008. This confirms the debt to plus ratio, the company is utilizing less debt to finance its assets and therefore disbursement less on paying involvements on loans to 3rd parties. The money is remaining in the company by stockholder ‘s money is being invested and the return traveling back to stockholders. Long term debt to equity same as debt equity, the involvement coverage ratio measures the easiness with which a company can pay involvement payments on its outstanding debt. Its 28.76 % in 2008 which means company ‘s involvement coverage ratio increased significantly which means it can pay off all its involvement payments with easiness when required, it was 74.62 % in 2006 and 73.25 % in 2007 so in 2008 its better so old old ages. Additionally, this ties into our old ratios where the company ‘s debts had decreased and they would hence hold to pay less involvement. The company is hence bring forthing a sufficient sum of grosss to cover its involvement payments. Appendix 1

Current Ratio

2006: 1.84

2007: 2.12

2008: 2.88

Explanation

The current ratio in 2006 was & A ; lb ; 1.84 to every & A ; lb ; 1, in 2007 it was & A ; lb ; 2.12 to every & A ; lb ; 1 and in 2008 it was 2.88. The current ratio shows us the current thought of the money that the concern needs to pay back. This is advancement for Spectrum as in 2006 they had to pay less back but now in 2007 and 2008 they are paying more.

Reason

This ratio shows how many assets a Spectrum has compared to liabilities, in other words how easy it would be able to pay its creditors. If the figure is merely over 1 so the concern may be in a hard place for payment as it current assets would be virtually to its liabilities. It is considered good to hold a figure of between 1.5 and 2, so that the concern can be certain it can pay its liabilities easy. A figure higher than 2 would non be good as the money should be placed elsewhere to better the concern. The figures for Spectrum show me that the concern is making good in 2008 and 2007 compared to 2006. The sum of assets in 2008 and 2007 has increased. In 2006 the current ratio shows that for every & A ; lb ; 1 Spectrum owes they owned & A ; lb ; 1.84 but in 2007 the figure was & A ; lb ; 2.12 and in 2008 the figure was & A ; lb ; 2.88. Another ground why their concern is non executing good is because of their current liabilities. In 2006 the current liabilities figure was & A ; lb ; 4,770 and in 2007 it was & A ; lb ; 4,307 and in 2008 it was & A ; lb ; 1,916. This shows me that the concern is in dept as Spectrum owes more money in 2006. The figures had dropped and their concern was non as healthy.

Therefore this could be harder for Spectrum to pay their measures and other disbursals, which are necessary for their concern. In 2007 and 2008 the public presentation of their concern was good as they could pay all their disbursals. Spectrum improved the public presentation of their concern by bettering the ratio. Appendix 1

Advantages of Ratios

Ratio is an of import and old technique of fiscal analysis. These are the undermentioned advantages of Ratio.

1. Accounting ratio aid to major profitableness of the concern, it tells the company about alterations in the earning capacity of the concern. Profitableness shows the existent public presentation of the company.

2. Ratios give all factors with successful and unsuccessful company.

3. It helps be aftering and prediction, ratios can help direction, Ratio analysis helps all foreigners about profitableness to pay them involvement and dividend etc.

4. Ratio analysis besides makes large different in public presentation of the company. Accounting ratios are helpful in giving difference in past and compare it to future.

5. Ratio analysis helps foreigners who are interested in investings in our company or Bankss giving loan etc.

6. Ratio analysis helps to workout in efficiency of the company with the aid of assorted ratios. Ratios are use to look into the public presentation of the companies in the utilising resources.

Shortcoming or Restrictions

To cipher Ratios are easy and simple to understand, there are certain restrictions or defect of the Ratios analysis and they should maintain in head while utilizing construing fiscal statements.

1. Different companies use different constabularies, one company can non ever compare with other companies. Different companies use LIFO footing and some other companies will utilize FIFO footing.

2. If the Ratios reply is right the lone ratio will be usage, for illustration if the rating of stock is based on higher monetary value, the monetary value will be inflated and it will give the incorrect reply.

3. Companies ne’er take ratios as a concluding reply sing good or bad fiscal place of the concern.

4. The monetary value alterations frequently and it make troubles in comparing, companies should do comparing before price-level alterations.

5. Ratio analysis are expensive, large companies can easy afford it but little companies are non able to afford it.

6. Companies are non differing in their nature, companies of similar companies are differ in their size. There are no more standard ratios, which can be accepted universally for comparing as the ratio analysis technique is reduced.

Fiscal and Non-financial Techniques

In this portion we will discourse about fiscal and non-financial techniques, which are as follows.

1. Profitableness ( Financial )

2. Activity Ratio ( Financial )

3. Benchmarking ( Non Financial )

4. Customer Service ( Non Financial )

1. Profitableness Ratio ( Financial )

We used profitableness ratio for Spectrum Company, profitableness ratio is a category of fiscal metric that are use to entree concern ‘s to do net income compared to their disbursals. We had checked that how Spectrum Company directors are good in bring forthing net income. We use Profitability ratio to look into how company is making. Higher value of rival ‘s ratio, will look into old twelvemonth consequence that company is making good.

2. Activity Ratio ( Financial )

Activity ratios show how expeditiously a company has managed liabilities and short-run assets. Spectrum Company would alter their production in to hard currency or gross revenues because it will take to higher grosss, but it is common for the twelvemonth terminal value to be used in order to obtain figures for comparative intents.

3. Benchmarking ( Non Financial )

Spectrum Company will look into its cost, rhythm clip, productiveness, or quality to another that is widely considered to be an industry. Benchmarking provides a snapshot of the public presentation, Spectrum Company would utilize benchmarking for better public presentation of concern and will assist to understand in relation to a criterion. Spectrum Company would seek to do good quality to do a best public presentation utilizing a specific index in ensuing in a metric public presentation that is so compared to others.

4. Customer Service ( Non Financial )

Many concern administrations use monitoring and measuring to better client service. Spectrum proctors and measure their client service, Spectrum Company monitor their services by making studies, inquiring clients feedback, inquiring them to make full the questionnaire and remark cards. They besides give can do betterments for the clients by developing their staffs ( client service preparation ) do that they know where the merchandises are and they can assist the clients to happen the merchandise. They can better their gross revenues by put ining new package ‘s in their web site for those client ‘s who are unable to travel to mills they can make shopping online.

Q1. ( B ) : Agency Theory

Agency theory is the fiscal economic sciences that looks at struggles between people with different involvements in the same assets. The struggles between,

Stockholders and directors of companies

Agency Theory is the theory that covers the struggles between agent of the house and the principal of the house, the agents are the directors and the principal are the shareholders, there will be a struggle if the end of the agents directors are non consists with the end of the shareholders and that end is fundamentally maximization of the shareholders wealth, And if there is struggle between this ends you will see will be bureau cost and those cost could affect 1000000s of dollar in under public presentation of the house.

Spectrum Company is really diverse group of companies and Spectrum company ‘s portions are owned by institutional investors, they are in board and they can talk up in forepart of managers. There may be a struggle of involvement between the board and the institutional investors direction as they Spectrum companies direction do n’t take that much hazard while diversifying their concern in India and other state. Institutional investors take the higher hazard instead than normal companies.

Q1. ( hundred ) : Dividend Policy

Dividend policy is company usage to make up one’s mind how much they have to pay dividend from the net net income. Now the company has to make up one’s mind what they have to pay in footings of dividend there are three methods of paying dividends.

Residual

Stability

Hybrid

Residual:

Residual dividend policy usage to bring forth equity to finance on new undertakings. Dividends can be pay out after subtracting all the new undertakings equity.

Stability:

Stability policy usage by companies to put a fixed fraction of quarterly net incomes, or some companies use table policy where they will put fraction quarterly dividends of annual net incomes. Stability policy reduces uncertainness of the investors and provides them income.

Loanblend:

Hybrid policy is the combination of stableness and residuary, in this instance companies must see the debt/equity ratio and it will be for long-run instead than short-run.

There are three chief places, which are as follows.

1. No Dividend Policy ( Zero Dividends )

2. Changeless Dividend Policy ( real/money footings )

3. Fixed per centum Payout Ratio policy

1. No Dividend Policy ( Zero Dividends )

Spectrum Company is puting in other states for more concern, they would utilize this policy because they will put their net income for investing. They are geting three fabric companies and four commercial companies in Russia, Singapore, Japan and Germany. In Annual General meeting they will discourse about this undertakings and will inquire from there stockholders.

2. Changeless Dividend Policy

This policy concern with existent or money footings, Spectrum Company would utilize this policy in instance they are non puting in other undertakings, so they can easy pay Changeless Dividend to there stockholders.

3. Fixed Percentage Payout Ratio Policy

If Spectrum Company decides they are paying dividend but should maintain some of it for investing in their new undertakings, so they can utilize Fixed Percentage Payout Ratio policy which means they would utilize ratio of administration or 10 % of the net income as dividend and staying will be usage in undertakings or investings.

Does Dividend Policy Matter?

Its depend upon the Company direction, what type of policy they chose if they will travel with stableness so they have to pay dividends and if they will travel with the Residual so they will put money foremost and from the staying sum they will pay the dividend and its besides depend upon the discoverer, what they are anticipating at the terminal U have to give a decision to them does dividend policy affair or non.

Q2. ( a ) :

Debt funding encouraged due to the fact that involvement expensed are deductible for revenue enhancement intents, dividends paid to stockholders is non considered as an disbursal for revenue enhancement intents.

Q2. ( B ) :

There are following three chief beginnings to finance Public Limited Companies.

The capital market: ( 1 ) New Shares ( 2 ) Right Issues

Bank adoptions

Retained net incomes

1. The capital markets

Ordinary Shares is the company chief beginning for funding, they issue ordinary portions in market. The ordinary portions have nominal or face value like & A ; lb ; 1 or 50 pence. The company ever publish ordinary portions for hard currency, the issue monetary value of ordinary portions must be greater than or equal to nominal value.

New portions issue by companies to lift up their finance, those which are already listed on Stock exchange do n’t necessitate to use for new enrollment, they can publish new portions in market.

A Right issue lifting up new portions capital in market, they can offer it to new client every bit good as old client.

2. Bank Borrowings

Taking adoptions from Bankss are besides beginning of financing a Public Limited Company, Companies invest this money in new undertakings or in another subdivisions where they need finance.

Short-term is an overdraft, which company keeps in bound set by bank with variable rate, short-run is sum which borrowed by company from bank, it can be borrowed for up to three old ages.

Medium-term is a loan, which borrowed by company three to ten old ages. The medium-term loan border is set by Bankss, its involvement rate is variable or fixed which is set by Bankss.

3. Retained Net incomes

Retained Net incomes is a net income, which we pay portion on dividends and the staying we use for Investings in new undertakings or sometime we keep as a net income. We use maintained net incomes to put in new undertakings instead so pay higher dividends.

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