1
Oing
STAKEHOLDER AND CAPITAL BUDGETING
Surname
Institution Affiliation
Course
Tutor
Date
Stakeholder and Capital Budgeting in Expansionary Project
The accounting information is first used by the company’s management. The financial reports are used by shareholders, market analysts, and lenders to assess a company’s financial health and profits prospective. Even though the management compiles the financial reports, the board and management must refer to them when analyzing its success and growth. The statement of financial position, Revenue and Expenditure statement, and cash flow statement are the three most important financial statements (Alleset al.,2021). The financial reports of the corporation contain representations of many significant stakeholders, which are discussed below.
According to the wealth maximization goal, management must increase the current value of predicted expected returns to the company’s shareholders. These profits can come in the form of regular dividend payments or earnings from the sale of ordinary shareholders. The present value of an outstanding payment or series of payments, when discounted appropriately, is characterized as the worth today of that payment or stream of payment transactions. The discount rate considers the potential returns from competing investment options over a specific time frame. The longer duration to obtain returns, such as a dividend payout or a stock price increase, lowers the level of confidence the investors have for the business.
Furthermore, the higher the risk of receiving a future return, the lower the value of returns for investors. The quantity, timing, and risk information about expected benefits projected to be obtained by stockholders are reflected in stock prices, a metric of shareholder wealth as Anggraeni et al., (2019) denotes. The market value of a stockholder’s common stock ownership is used to determine their wealth. As a result, total capital structure equals the number of shares outstanding multiplied by the current market value of equity. The goal of maximizing shareholder value has several specific advantages. For starters, this goal expressly incorporates the duration and risk.
Third, maximizing shareholder retained earnings is an impersonal ambition. Stockholders who disagree with a company’s policy have the option of selling their shares on more advantageous conditions, such as at a higher price than any other approach and investing their money elsewhere. Suppose an investor’s purchasing behavior or investment decisions is not satisfied by a company’s investment, lending, or dividend policy. In that case, the shareholder will be free to sell their shareholding interests at the highest price. Also, they can decide to buy stocks in firms that better match the investor’s preferences because of these considerations, the fundamental goal of financial management is to maximize shareholder wealth. Caffieri et al., (2018) discussed that Concerns about a consumers’ operational duties, the prevalence of additional aims pursued by some management, and issues arising from corporate governance may induce some owners and managers to deviate from pure wealth-maximizing activity. These stakeholders so far have included customers, investors, and the government.
Nonetheless, maximizing shareholder value serves as a benchmark against which accurate decisions can be measured and is thus assumed in corporate finance research. There is frequently a misalignment between maximizing shareholder wealth and the actual goals followed by management (Dambra, 2018). The separation of ownership and control management and organizational performance has been cited as the fundamental cause of this disparity. Separation of ownership and management has allowed managers to pursue aims aligned with their personality if investors are satisfied enough to keep control of the company. A fourth stakeholder includes the employees of an organization. The most important stakeholder is the employee; an employee is responsible for ensuring production and profitability for other stakeholders. Ensuring that all employees understand the goals and not to cause too many expenditures can allow for profits to increase, meaning other stakeholders get to see a return in profit.
Management. Management is a team of professionals managing an entity’s resources and affairs to achieve its goals and objectives. Many managerial responsibilities are carried out by managers, including planning, managing, directing, monitoring, analyzing, and take corrective measures. Business executives must constantly decide what objectives, how to accomplish them, and whether the actual outcomes match the original plans and objectives. Accounting provides the administration with timely and valuable information for strategy, control, performance assessment, decision-making, and various other functions and procedures (Miller& O’Leary 2019). As a result, management is among the most significant users of accounting information and providing meaningful information to the management is a significant function of the accounting and finance department.
Direct financial interest users. Existing and future investors and debtors are stakeholders who have a significant financial interest in the business. These users are not involved in the company’s natural management; however, they are interested in company performance because they have ventured or are investing in it. Present and prospective investors are actively interested in a corporation’s historical performance and its future earnings potential and expansion possibilities. Financial accounts and other company financial information should be examined to determine and select the most viable investment vehicle. Likewise, current and prospective creditors require accounting information to make appropriate credit judgments, such as whether to lend funds to a company. The creditors want to know if the company will have enough cash flow to pay interest and settle the debt by the deadline. The financial analysts should examine the company’s solvency and liquidity status. Before extending a loan to a company, corporations, mortgage lenders, financial institutions, insurance firms, personal creditors, and other comparable individuals and organizations need accounting information by analyzing a company’s profitability, solvency, and financial position.
Indirect financial interest users. Other stakeholders have an indirect interest in an overall company’s profits or utilize accounting information to assist others who directly stake in a company’s operational and liquidity status. Customers, taxing authorities, government regulatory bodies, labor unions, investment managers and counselors, Trading Platforms and brokerage, underwriters, statisticians, planners, consumer advocates, the public at large, and financial journalism are examples of such stakeholders. Customers can use financial statement information to predict the probability and timeframe of a company going bankrupt or failing to satisfy its obligations. This data could help calculate the value of a warranty, projecting the accessibility of encouraging investment or ensuring the continued supply of commodities over time. For the process of determining a company’s tax liability, taxing authorities demand accounting information. The government and regulatory authorities regulate the financial activities of businesses to preserve the public good. Labor unions are likewise concerned about the sustainability and profitability of the business that employs them or where the employees work. Because they advise investors and creditors on their investment-related decisions, investment bankers, stock advisors, and wealth managers have an indirect interest in a company’s financial and aspirations. Economic planners use accounting data to formulate fiscal plans, forecast economic growth, and analyze the country’s economic programs. Other stakeholders, including consumer organizations, economists, forex traders, and the general public, have become increasingly worried about business companies and their consequences on the environment, societal issues, hyperinflation, and standard of living.
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4) Decision Model Metrics
The payback period ignores the time value of money and fails to modify cash inflows appropriately. The TVM is the concept that cash now will be valued more than it will be in the long term because of contemporary earning potential (Vuorinen & Martinsuo,2019). The payback period analysis ignores future cash flows that occur after the payback period, making it impossible to compare the entire profitability of one investment to another. The payback period capital budgeting is flawed because it does not account for the complexities of cash flows forecasted with capital expenditures. This technique also overlooks aspects such as financial risks that are inherent to specific investments. Payback period evaluation is sometimes performed as a preliminary evaluation and then augmented with other capital budgeting techniques such as the IRR and the NPV.
Capital Budgeting for a Company
CAPM=Risk-Free Rate of Return + Beta × (Market Rate of Return – Risk-Free Rate of Return
The risk-free rate in the market
5%
The difference between the expected return on the market and the risk-free rate is
5%
The beta of the company
2
Tax rate
0.4
Cost of Equity
15%
WACC
WACC = Weightage of Equity * Cost of Equity + Weightage of Debt * Cost of Debt * (1 – Tax Rate)
Weightage of Equity
50%
Cost of Equity
15%
Weightage of Debt
7%
Cost of Debt
50%
Tax rate
40%
WACC
0.417
Machine cost
$500,000
Useful Life of the Machinery
5
Depreciation Costs
$100,000
Tax Rate
40%
Year
2018
2019
2020
2021
2022
2023
Initial investment
-500,000
Units sold
$2.10
3,500,000
3,675,000
3,858,750
4,051,688
4,254,272
Revenue ($)
7,350,000
7,717,500
8,103,375
8,508,544
8,933,971
Variable costs ($)
3,850,000
4,042,500
4,244,625
4,456,856
4,679,699
Fixed costs ($)
100,000
100,000
100,000
100,000
100,000
Depreciation
($)
100,000
100,000
100,000
100,000
100,000
Profit before tax ($)
3,300,000
3,475,000
3,658,750
3,851,688
4,054,272
Tax expense ($)
1,320,000
1,390,000
1,463,500
1,540,675
1,621,709
Profit after tax ($)
1,980,000
2,085,000
2,195,250
2,311,013
2,432,563
Add: Depreciation ($)
100,000
100,000
100,000
100,000
100,000
cash flow ($)
-500000
2,080,000
2,185,000
2,295,250
2,411,013
2,532,563
PV of cash flow ($)
-500000
1,897,810
1,818,990
1,743,405
1,670,926
1,601,428
Unit Sell:
$2.10
$2.30
$1.90
NPV
8,232,560
7351644.26
6470728.58
IRR
420.91%
378.86%
336.79%
MIRR
94.20%
90.11%
85.64%
Payback period
0.24
0.27
0.3
Discounted payback period
0.26
0.29
0.33
As the NPV increases the IRR and MIRR percentages are higher but the shorter the payback period is. The main problem with the payback period is it does not consider cash flows once the payback of the initial investment is achieved. Discounted payback, alleviates, to a certain extent, the issue with ordinary payback, in that the former considers the discounted cash flows, that give time value to money.
References
Alles, L., Jayathilaka, R., Kumari, N., Malalathunga, T., Obeyesekera, H., & Sharmila, S. (2021). An investigation of the usage of capital budgeting techniques by small and medium enterprises. Quality & Quantity, 55(3), 993-1006.
Anggraeni, M., Gupta, J., & Verrest, H. J. (2019). Cost and value of stakeholders participation: A systematic literature review. Environmental Science & Policy, 101, 364-373.
Caffieri, J. J., Love, P. E., Whyte, A., & Ahiaga-Dagbui, D. D. (2018). Planning for production in construction: controlling costs in major capital projects. Production planning & control, 29(1), 41-50.
Dambra, M. J. (2018). Stakeholder conflicts and cash flow shocks: Evidence from changes in ERISA pension funding rules. The Accounting Review, 93(1), 131-159.
Miller, P., & O’Leary, T. (2019). Capital budgeting practices and complementarity relations in the transition to modern manufacture: a field-based analysis. Journal of Accounting Research, 35(2), 257-271.
Vuorinen, L., & Martinsuo, M. (2019). Value-oriented stakeholder influence on infrastructure projects. International journal of project management, 37(5), 750-766.
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