Home work: 05/12/2011

WACC
Weighted average cost of capital : It is the marginal cost of capital, or the percentage or the proportion cost of all sources of capital. Practical problems: 1. Might accept projects with negative NPV and override projects with positive NPV. 2. The WACC calculate the whole marginal cost of capital, therefore it is not clear which division have a higher risk. 3. International market can also influences WACC, e.g. rate exchange. 4. Difficult to obtain market value for all source of capital. 5. Difficult to determine which source of fund to include when calculating WACC? e.g bank overdraft? 6.

Ordinary share:
Ordinary shares also known as equity shares. It represents the owners of the company. Advantages: 1. As the company owners, they have the privilege of receiving a part of company profits via dividends, after the paying preference share. 2. They also have the right to vote at general meetings of the Company. Disadvantages: 1. Their position is very at the highest risk, if there is loss, they might loose any dividends payable at the end of the year. 2. At risk also because if the market values for share dropped.

Debentures
They are the non-ownership capital, (Long term loan capital). Advantages: 1. Debentures have no right to vote in the general board meetings or election, therefore they have no control over the company. 2. They can be redeemed when the company has surplus funds. 3. They have lower rate of return. 4. Tax benefits (debentures interests are treated as expenses in the profit and loss account, therefore this will be exempt from paying tax).

Disadvantages: 1. Debentures are entitled for fixed interest rate; it does not matter if the company makes profit or loss. 2. Their money has to be paid on agreed date.

Ratios explanation
1. Liquidity Current Ratio Acid test 2010 1.2 0.75 2011 1.4 0.85 Average 1.85 1.21

Although Eddisons plc has slightly better liquidity in 2011 in comparison to 2010, but it is noticeable that other companies in the same sector have better liquidity, Ideally a current ratio of around 2 is preferable, however, this depends on the nature of the business, but according to this business the company still not working hard to meet with the average. It is obvious from the P&L sheet that the company has increased their bank overdraft, which reflect increases in current liabilities, therefore affect the ratio, however there is also increase in current asset, but not as it should be. In case of acid test, it is obvious from the table above that Eddison plc asset unable to meet their short-term obligations (Ratio for both years is < 1.0), although it has improved slightly in 2011, but again in comparison to the average in this sector, it is still below the average. Therefore Eddison plc might be experiencing liquidation problems and might be at risk.

2. Efficiency: 2010 Stock holding period 303.30 days 310 days 2011 162.84 days Average ?

Average collection period

175 days

75 days

As it shown on the table above Edisson plc has become more efficient in holding the stock (the best way of dealing with the stock just in time). And also more efficient in collecting their money from trade debtors, this will allow them to use the space and the money collected to invest in another profitable projects, however, when in comparison to the average companies in the same sectors, it is apparent the Eddisons plc is far below the average on collecting money from deports. May they will need to work harder to decrease their cost of sales, as will as increase their cash sales. 3. Stability ???? Not sure about the solution.

GR% TIE

2010 1.5% 0.1 times

2011 6.9% 0.44 times

Average 25% 15 times

The gearing has increased slightly for 2011, which is not a good sign, however the GR% is still lower than the average in companies with same sector. The higher the gearing ratio, the more high risk of liquidation the company facing.