Purpose of Assessment and provide evidence on:
- A good knowledge of Manage Finance within the case study.
- A good knowledge of ratio calculation.
- Provide financial business recommendations and presentation.
Assessment Task - Group Assignment
Expansion of Health Care Business
Jordan Pty Ltd is a family owned business involved in the provision of excellent health care services and operates mainly in suburban areas. Recent population boom in the areas in which it operates is a blessing for the business as far as healthcare demand is concerned. The managing director, Edward Jordan desires to increase their services by enlarging the operations to cater for the increased demand for health care. Edward is of strong opinion that an immediate expansion of their operations could not only lead to increased profits but also keep off any competitors establishing themselves in Jordan's territory.
Edward feels that engaging an expert business consultant to prepare the business plans for the proposed expansion will be extremely useful and approaches you for this purpose. As a first step to base the advice, Edward expresses his wish that the company should maintain the current financial structure for expansion. This may be also the wish of the shareholders unless there are strong reasons to change.
A business can finance its operations with equity capital i.e. ordinary shares, and retained earnings if any, and/ or with debt capital. Usually it will be a combination of these financing sources. Bonds, long term bank loans and other long term borrowings are all examples of debt capital.
The proportion of equity and debt capital is considered when analysing capital structure. When people refer to capital structure they are most likely to be referring to a business' debt-to-equity ratio, which provides insight into how risky a company is. Usually a business more heavily financed by debt capital poses greater risk. A higher debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can diminish the profits as a result of the additional interest expense. The costs of the different sources of capital are also an important consideration when considering the capital structure. Cost of capital in simple terms is the interest or return one is expected to pay for utilising the funds provided by the lender or owners /shareholders.
The main shareholders of Jordan Pty Ltd. are upmarket entrepreneurs who always try to follow the family values and principles. They do not believe in too much borrowed funds and are capable of bringing in additional equity capital into the business if needed.
You are told that the expansion needs a capital infusion of $5 000 000 which will bring in additional before interest and tax income of $1 150 000 per year.
The business tries to minimise its cost of capital and optimise the mix of equity capital and debt capital. The market price of an equity share is taken as the original issue price (i.e. $1) and 40% of the after tax income is distributed as dividend (ignore growth rate of dividend). The current company tax rate is 30% which not expected to change in the foreseeable future.
You are made available the following financial statements.
Jordan Pty Ltd
Income Statement
For the year ended 30 June 20X2
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$
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Total revenue
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1, 820 000
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Total operating Expenses:
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Salaries
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640 000
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Payroll taxes
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25 350
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Retirement plan
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56 000
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Health insurance
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38 000
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Total staff expenses
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759 350
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Interest on long term loans
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144 000
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All other expenses
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221 300
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Total expenses
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1 124 650
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Net income
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695 350
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Jordan Pty Ltd Balance Sheet as at 30 June 20X2
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Assets
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Cash
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125 450
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Accounts receivable
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282 980
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Less: Allowances for doubtful debts
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(6 100)
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Prepaid expenses
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8 650
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Buildings, furniture and equipment
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4 620 000
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Less: Accumulated depreciation
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(804 480)
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Net long term assets
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3 815 520
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Total assets
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4 226 500
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Liabilities and Equity
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Total current liabilities
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226 500
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Long-term loans
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1 200 000
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Total liabilities
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1 426 500
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Equity ($1 ordinary shares)
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2 800 000
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Total liabilities and equity
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4 226 500
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You decide that you need to do certain calculations for providing proper advice to the Managing director of Jordan Pty Ltd and feel that the following are necessary.
(a) Current ratio
(b) Debt to equity ratio
(c) Return on shareholders' funds
(d) Earnings per ordinary share
(e) Interest rate on the long term loans
Your investigation shows that although the interest rates for new long term loans would be anything up to 15% the financial institutions are prepared to provide a long term loans at a special interest rate of 12.5% to Jordan Pty Ltd (because of the sound financial standing of the shareholders) as long as the new long term loan does not exceed the new equity investment by the shareholders in ordinary shares. If borrowing is more than this then Jordan Pty Ltd has to pay the market rate of interest on the whole new borrowing.
Also you discover that the amount of long term loan for the last year was unchanged throughout the year.
You are required to:
Part A
1. Complete the calculations you deem necessary for your advice.
(a) Current ratio
(b) Debt to equity ratio
(c) Return on shareholders' funds
(d) Earnings per ordinary share
(e) Interest rate on the long term loans
2. What is the current cost of equity capital?
3. Write a report on Health Care Business.
Part B Presentation
4. Briefly explain the orgnisation and justify ratios you identified and analysed from Part A.
5. Outline your RECOMMENDATIONS for implementing treatments for the identified ratios (this will be the main part of your presentation).
6. Summarise your presentation with beneficial conclusion for the organisation.