Fiscal Mngmnt GloCul Assignment 1

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Nov 24, 2024

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1 Fiscal Mngmnt GloCul Assignment 1 Student Name: Institutional Affiliations: Date of Submission>

2 Part 1 Question 1 Changing the business organization from a partnership to a corporation can have advantages and disadvantages. One of the main advantages is that a corporation offers limited liability protection to its owners (Turoń, 2022). This means that the personal assets of Wang and Sanjay are protected in case the company incurs any debts or legal liabilities. In a partnership, however, both partners have unlimited liability, meaning they are personally responsible for any debts or legal claims against the business. This can put their assets at risk, a major concern for many business owners. Another advantage of incorporating the business is that it can make it easier to raise capital. As a corporation, Wang and Sanjay can sell shares of stock to investors to raise funds for expanding their business (Turoń, 2022). This can be especially beneficial if they want to expand internationally, as it requires significant capital. Additionally, being a corporation can also increase the credibility and reputation of their business, making it easier to attract investors and partners. However, there are also some disadvantages to changing the business organization from a partnership to a corporation. One main drawback is increased paperwork and legal requirements (Wackowski et al., 2022). As a corporation, Wang and Sanjay will have to follow certain regulations and file various legal documents, such as articles of incorporation and annual reports. This can be time-consuming and expensive, especially for a smaller business. The only legal requirement in a partnership is to register the partnership with the state. Another disadvantage is that corporations are subject to double taxation. This means the business's profits are taxed at the corporate level and then again when distributed to the owners

3 as dividends (Wackowski et al., 2022). In a partnership, the profits are only taxed once, as they are considered personal income for each partner. This can result in a higher tax burden for Wang and Sanjay if they choose to incorporate their business. Question 2 Limited liability is a legal concept often associated with business entities such as limited partnerships, companies, and corporations. It means that the owners or shareholders of these businesses are not personally liable for the debts and obligations of the entity. This means that their assets are protected in the event of any financial losses or legal issues the business faces (Conte et al., 2019). Limited liability is considered a key benefit of these business structures because it helps mitigate the financial risks of starting and running a business. In the context of Wang and Sanjay's partnership, this would mean that their assets, such as their savings or property, would not be at risk if the business fails or faces any legal liabilities. The business is a separate legal entity whose debts and obligations are distinct from the owners. Question 3 I. If the company continues as a partnership, both Wang and Sanjay would be personally liable for the company's debts. This means they would each have to pay the $6 million in unpaid debts, regardless of their investments in the business (Bustinza et al., 2019). In this scenario, both partners would have to contribute an equal amount of $3 million to cover the outstanding debts. ii. If the company is changed to a corporation, the nature of liability changes. In a corporation, shareholders are not personally liable for the company's debts (Bustinza et al., 2019). Therefore, Wang and Sanjay would only be responsible for paying the debts up to the amount of their investments. In this case, each partner would only have to pay the amount they

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4 invested, which is $2.5 million each. Any remaining debt would be the responsibility of the corporation and its assets. It is important to note that shareholders are also protected from any personal liability for the company's actions or decisions in a corporation. This would address Sanjay's concern about potential agency problems (Bustinza et al., 2019). Additionally, as Wang mentioned, incorporating the business could attract investors who would be willing to invest in the company without having to worry about personal liability. However, incorporating a business also comes with certain costs and legal formalities that must be followed, such as filing for incorporation, issuing stocks, and appointing a board of directors. It is important for Wang and Sanjay to carefully consider these factors before making a decision (Bustinza et al., 2019). They should also consult with legal and financial professionals to fully understand the implications of incorporating their business. Question 4 A public issue of securities refers to offering new securities to the general public for sale. This can be done through an initial public offering (IPO), where the company's shares are presented first, or through a seasoned equity offering (SEO), where the company issues additional shares to the public. An example of a public issue is when a company's shares are listed on a stock exchange for the general public to purchase, such as the New York Stock Exchange (Bustinza et al., 2019). Another example is when a company raises funds through a bond issue traded on the bond market. On the other hand, a private issue of securities refers to offering new securities to a select group of investors rather than the general public. This can include issuing shares to private

5 investors, such as venture capitalists or angel investors, or offering bonds to a select group of institutional investors. An example of a private issuance would be a company receiving funding from a private equity firm in exchange for a percentage of ownership (Bustinza et al., 2019). Another example is when a company issues private placement bonds to a group of institutional investors, such as insurance companies or pension funds. When considering the costs associated with issuing securities in the financial market, Wang and Sanjay must take into account the various flotation costs. These are the costs incurred when a company issues new securities and includes expenses such as underwriting fees, legal fees, and registration fees. Examples include printing and marketing costs, consulting, and due diligence fees (Gong et al., 2021). Issuing securities may also incur indirect costs, such as the opportunity cost of diluting ownership and potential conflicts with current shareholders. It is important for Wang and Sanjay to carefully weigh these costs and consider which method of issuing securities would be the most cost-effective for their business. Furthermore, concerning public issues, Wang and Sanjay must also consider the costs associated with meeting regulatory requirements and compliance, such as disclosure and reporting requirements (Gong et al., 2021). These costs can be significant and must be factored into their decision-making process. On the other hand, with private issues, they must consider the potential costs of working with private investors, such as giving up control and sharing profits with the investors. Overall, deciding between a public or private issue of securities should involve a thorough analysis of the various costs and benefits associated with each option, as well as the specific needs and goals of the business. Part 2 Question 5

6 The company's profit for 2022 can be calculated as follows: Net Income = Earnings before interest and taxes - Interest - Taxes = $130 million - $19 million - ($111 million * 11.71%) = $130 million - $19 million - $12.99 million = $98.01 million Therefore, the company's profit for 2022 was $98.01 million. Question 6 To compute the profitability ratios, we will use the formula: i. Profit margin = Net income/Total operating revenues = 98/1262 = 7.76% The company's profit margin has decreased slightly compared to the previous year (7.76% in 2022 compared to 8.25% in the last year). This means that the business did worse in 2022 compared to the industry, as the industry had a profit margin of 7.07%. ii. Return on assets = Net income/Total assets = 98/143 = 68.53% The return on assets for the company has also decreased compared to the previous year (68.53% in 2022 compared to 125.87% in the last year). This indicates that the business did worse in 2022 than the industry, as the sector had a return on assets of 60.00%. iii. Return on equity = Net income/Stockholders' equity = 98/60 = 163.33% The return on equity for the company has also decreased compared to the previous year (163.33% in 2022 compared to 302.08% in the last year). This shows that the business did worse in 2022 than the industry, as the sector had a return on equity of 42.50%.

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7 iv . Operating cash flow = EBIT + Depreciation - Taxes = 130 + 90 - 13 = 207 Operating cash flow for the company is positive, indicating that the business has enough cash to finance its operations. However, it has decreased from the previous year (207 in 2022 compared to 233 during the last year). This may be due to the decrease in profitability. Overall, Wang and Sanjay should be concerned about the decrease in profitability ratios in 2022, as it indicates that the business did worse compared to the industry. They should carefully analyze the reasons for this decline and take necessary measures to improve the financial health and performance of the business (Putri, 2021). They should also keep track of the industry's performance and make strategic decisions to stay competitive in the market. Question 7 The current ratio measures a company's ability to pay its short-term obligations with its existing assets. It is calculated by dividing the total current assets by the current liabilities. The current ratio for the business in 2022 can be calculated as follows: Current ratio = Total current assets / Total current liabilities = (Cash + Other existing assets) / Accounts payable = (25 + 88) / 35 = 3 times This indicates that the business has three times more current assets than current liabilities. This is a strong current ratio, above the industry average of 3 times. It shows that the company's short-term liquidity position is strong and can easily meet its short-term obligations. The total debt ratio measures the company's total debt concerning its total assets. It is calculated by dividing the total debt by the total assets.

8 The total debt ratio for the business in 2022 can be calculated as follows: Total debt ratio = Total debt / Total assets = (Long-term debt) / (Cash + Other current assets + Net fixed assets) = 48 / (25 + 88 + 30) = 60.0% This means that 60.0% of the company's total assets are financed through debt. This is lower than the industry average of 60.0%, indicating that the business has a lower debt level than its assets. This could be seen as a positive sign, as it reduces the company's financial risk and increases its financial stability. Assuming that the business projects a 35% increase in operating revenue each year, the anticipated operating revenue in three years (2025) can be calculated as follows: Operating revenue in 2022 = $1262 million 35% increase in 2023 = $1262 x 1.35 = $1704.7 million 35% increase in 2024 = $1704.7 x 1.35 = $2301 million 35% increase in 2025 = $2301 x 1.35 = $3108.4 million Therefore, the anticipated operating revenue in three years (2025) will be $3108.4 million, a significant increase from the current operating income of $1262 million. This increase in revenue will boost the business's cash flow and help maximize its value. Going public can be a good way to raise capital for the company to achieve this growth and maximize its value. Question 9 Assuming that net income increases by 30% each year, the projected net income for the next three years (2023, 2024, 2025) can be calculated as follows:

9 Net income in 2022 = $98 million 30% increase in 2023 = $98 x 1.30 = $127.4 million 30% increase in 2024 = $127.4 x 1.30 = $165.62 million 30% increase in 2025 = $165.62 x 1.30 = $215.4 million Therefore, the projected net income for 2025 is $215.4 million. To calculate the profit margin, we need to divide the net income by the operating revenue, which we calculated earlier as $3108.4 million. Profit margin in 2025 = $215.4 million / $3108.4 million = 6.93% Question 10 To calculate the earnings per share in 2025, we need to divide the net income by the number of shares. Earnings per share in 2025 = $215.4 million / 10 million shares = $21.54 per share If the company projects a 35% increase in operating revenue and a 30% increase in net income each year, going public may help it maximize value and increase sales and cash flows. It will also result in a higher EPS for their shareholders, making the business more attractive to potential investors.

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10 References Bustinza, O. F., Gomes, E., Vendrell‐Herrero, F., & Baines, T. (2019). Product–service innovation and performance: the role of collaborative partnerships and R&D intensity. R&D Management , 49 (1), 33-45. Conte, M. S., Bradbury, A. W., Kolh, P., White, J. V., Dick, F., Fitridge, R., ... & for the Joint, G. W. G. (2019). Global vascular guidelines on the management of chronic limb-threatening ischemia. European Journal of Vascular and Endovascular Surgery , 58 (1), S1-S109. Gong, G., Huang, X., Wu, S., Tian, H., & Li, W. (2021). Punishment by securities regulators, corporate social responsibility and the cost of debt. Journal of business ethics , 171 , 337- 356. Putri, P. A. D. W. (2021). The effect of operating cash flows, sales growth, and operating capacity in predicting financial distress. International Journal of Innovative Science and Research Technology , 6 (1), 638-646. Turoń, K. (2022). From the classic business model to open innovation and data sharing—The concept of an open car-sharing business model. Journal of Open Innovation: Technology, Market, and Complexity , 8 (1), 36. Wackowski, K., Tien, N. H., Dao, M. T. H., & Minh, D. T. (2022). Business strategy of Vietnamese real estate developers: The use of CPM matrix for analysis. International journal of multidisciplinary research and growth evaluation , 3 (1), 205-209.

Fiscal Mngmnt GloCul Assignment 1

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