Assignment Brief

BA International Business & Finance

Academic Year 2017-18
Module Information:
Qualification: BA International Business & Finance

Module Code & Title: BAIBF 09016 – Advanced Corporate Financial Reporting and Finance

Assignment Title: Individual Report

Component Weighting: 30%

Date of Issue:03/04/2018 Due date: 13/04/2018

To be filled by the student:

Student ID:3135BA16

Date of Submission:

*All work must be submitted on or before the due date. If an extension of time to submit work is required, a Mitigating
Circumstance Form must be submitted.

Has an extension been approved? Yes No

If yes, please provide the new submission date ….…/.…. /……., and affix appropriate evidence.

First Marker: Second Marker:

Agreed Mark: Refer: Yes / No

General Guidelines
1. A Cover page or title page – You should always attach a title page to your assignment. Use
previous page as your cover sheet and be sure to fill the details correctly.
2. This entire brief should be attached in first before you start answering.
3. All the assignments should be prepared using word processing software.
4. All the assignments should print in A4 sized paper, and make sure to only use one side
printing.
5. Allow 1” margin on each side of the paper. But on the left side you will need to leave room for
binding.
6. Ensure that your assignment is stapled or secured together in a binder of some sort and send
the Softcopy of your final document to assignment.bahons2016@gmail.com.
7. The submission of your work assessment should be organized and clearly structured.

Word Processing Rules

1. Use a font type that will make easy for your examiner to read. The font size should be 12
point, and should be in the style of Times New Roman.
2. Use 1.5-line word-processing. Left justify all paragraphs.
3. Ensure that all headings are consistent in terms of size and font style.
4. Use footer function on the word processor to insert Your Student ID, Name, Subject, Module
code, and Page Number on each page. This is useful if individual sheets become detached
for any reason.
5. Use word processing application spell check and grammar check function to help edit your
assignment.
6. Ensure that your printer’s output is of a good quality and that you have enough ink to print
your entire assignment.

Important Points:
1. Check carefully the hand in date and the instructions given with the assignment. Late
submissions will not be accepted.
2. Ensure that you give yourself enough time to complete the assignment by the due date.
3. Don’t leave things such as printing to the last minute – excuses of this nature will not be
accepted for failure to hand in the work on time.
4. A printed version of the assignment needs to be submitted physically along with an soft copy
mailed to the email mentioned above on or before the stated deadline.
5. You must take responsibility for managing your own time effectively.
6. If you are unable to hand in your assignment on time and have valid reasons such as illness,
you may apply (in writing) for an extension.
7. Non-submission of work without valid reasons will lead to an automatic REFERRAL. You will
then be asked to complete an alternative assignment.
8. Take great care that if you use other people’s work or ideas in your assignment, you properly
reference them in your text and any bibliography, otherwise you may be guilty of plagiarism.

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 Statement of Originality and Student Declaration

I hereby, declare that I know what plagiarism entails, namely to use another’s work and to present it
as my own without attributing the sources in the correct way. I further understand what it means to
copy another’s work.
1. I know that plagiarism is a punishable offence because it constitutes theft.
2. I understand the plagiarism and copying policy of the University of the West of Scotland.
3. I know what the consequences will be if I plagiaries or copy another’s work in any of the
assignments for this program.
4. I declare therefore that all work presented by me for every aspect of my program, will be my
own, and where I have made use of another’s work, I will attribute the source in the correct
way.
5. I acknowledge that the attachment of this document signed or not, constitutes my agreement
on it.
6. I understand that my assignment will not be considered as submitted if this document is not
attached to the attached.

Student’s Signature: …………………………… Date: 17/04/2108

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TASK 1

Discuss the ways and practical implications of raising debt and equity for a listed company and its
impact on WACC (use real life examples) (10 marks)

A detailed insight on IFRS and IAS (10 marks)

Format and Presentation (5 marks)

References (5 Marks)

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 PART A

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The Debt and equity capital are two very different types of funds that can allow an
organization to accomplish its goals. Debt capital is borrowed the money that must be repaid
in full with interest at a regular intervals. Equity capital is the money that is exchanged for
some shares of ownership in a company. Debt and equity transfers usually involve of money,
but can be anything of value the entity requires and finds acceptable, like highly skilled labor
or any specialized equipment.

1. Debt Capital
The most common debt capitals are bank loans, personal loans, bonds and credit card. When
looking forward, a company can raise additional capital through a new loan or opening a line
of credit. This type of funding is referred as a debt capital because it involves borrowing of
money under a contractual agreement to repay funds at a later date. The different types of
raising debts are: redeemable and irredeemable debt.

With the possible exception of personal loans from the generous friends or family
individuals, debt capital carries with it and the additional burden of the interest. This expense,
would be incurred just for the privilege of accessing the funds, it is referred to as the cost of
debt capital.

The accumulation of interest is one of the limitations of debt capital. In addition, the
payments must be made to lenders regardless of the business performance. In a low season or
worse economy, a highly advantaged company may have debt payments that will exceed its
revenue. However, because the lenders are having a guaranteed payment on the outstanding
debts even in the absence of adequate revenue, and the cost of debt capital tends to be lower
than the cost of equity capital.

2. Equity Capital
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Equity capital is generated by the sales of the shares of the stock. If taking on more debt, it is
not financially suitable. The different ways of raising it are: IPO (Initial Public Offerings),
placements and rights issue.

The primary benefit of equity capital is, unlike the debt capital, the company is not required
to repay the shareholders investment. As an alternative, the cost of the equity capital refers to
the amount of return on investment of the shareholders which expects based on the
performance of the larger market. Those returns come from the payment of dividends and a
healthy stock valuation. The disadvantage to equity capital is that each shareholder owns a
small piece of the company, so business owners are beholden to their shareholders and must
ensure the business remains profitable to maintain an elevated stock valuation while
continuing to pay any expected dividends.

Because preferred shareholders have a higher claim on company assets, the risk to preferred
shareholders is lower than to common shareholders, who occupy the bottom of the payment
food chain. Therefore, the cost of capital for the sale of preferred shares is lower than for the
sale of common shares. In comparison, both types of equity capital are typically more costly
than debt capital, since lenders are always guaranteed payment by law.

(Wikipedia 15/04/2018)

The Ways in Raising Debt

1. Redeemable bonds / Convertible debt

It gives the investors an option to choose between shares or cash. The investors will
choose to convert it into an equity share if its market price is more than its value or if else
it is redeemed at the value on the maturity date. However some investors will choose the
share which shows a speculating increased dividend returns in the future.

The cost of redeemable debt (which is denoted as kd) is calculated using an IRR
(INTERNAL RATE OF RETURN) equation by taking the NPV at both higher, R2 and
lower, R1 interest rates.

𝑹𝟐−𝑹𝟏
Formula: kd= 𝑹𝟏 + 𝑵𝑷𝑽𝟏−𝑵𝑷𝑽𝟐 × 𝑵𝑷𝑽𝟏

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 2. Irredeemable debt

Those are the debts which have no specific redemption date and therefore gives
everlasting interest earnings to the investor till it is repaid.

The cost of raising irredeemable debt is calculated as follows:

𝒊(𝟏−𝑻)
Formula: kd= , (i= interest paid per annum; T= tax rate; P0= market price bonds)
𝑷𝟎

(Advanced financial reporting study material, Kaplan, 15/04/18)

The ways in Raising Equity

1. IPO (INITIAL PUBLIC OFFERINGS)

IPO is the term used for the first time issue of shares in a company which is offered to the
public. IPO offers different classes of shares to be purchased- a common and a preferred
stock.

(ADVANCED FINANCIAL REPORTING STUDY TEXT, KAPLAN, 15/04/18)

2. PLACEMENT

A placement is a sale of securities to number of private investors as opposed to the

general investing publican hence they are exempt from being registered with the
Securities and Exchange Commission.

(Investopedia, 15/04/18)

3. RIGHTS ISSUE

Rights issue is the pre-emption rights of an existing shareholder to issue the additional shares
ahead of the outside investor to retain the control within the entity.

Proportion ratio:

The additional shares are issued in a proportion to the size of their share held in the company.

Issue price:

It is issued at the price lower of the current market value of the shares.

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Theoretical ex rights price (TERP):

This is the price at which the shares are traded after rights issue. If the TERP falls below the
market price after an issue, it will have a negative impact on the equity.

(𝑁×𝑐𝑢𝑚 𝑟𝑖𝑔ℎ𝑡𝑠 𝑝𝑟𝑖𝑐𝑒)+𝑖𝑠𝑠𝑢𝑒 𝑝𝑟𝑖𝑐𝑒

Formula:
𝑁+1

(Advanced financial reporting study text, Kaplan, 15/04/18)

The weighted average cost of capital

The weighted average cost of capital (WACC) is the rate at which the company is expected to
pay on average to all its security holders and is commonly referred to as firms cost of capital.
It is made up of cost of equity, debt, loans and preference shares weighted according to the
proportion of each to the total pool of funds. It aids in retaining the investors by indicating the
minimum return that a company must earn on an existing asset base to satisfy its creditors,
owners, and other providers of capital.

(Advanced financial reporting study text, Kaplan, 15/04/18)

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 PART B

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 INSIGHT ON IFRS AND IAS
Over the last decade, the world has witnessed the adoption of IAS/IFRS in a vast
number of countries (IFRS 2014). According to Mackenzie et al. (2013, 17), the
IAS/IFRS can be formally defined as a single set of financial reporting standards
which has been accepted globally in regard to preparation for financial statements of
public companies. This accounting standards set has been established and developed
by the International Accounting Standards Board (ISAB). This sub-part will represent
the origin and the development of the IASB and IAS/IFRS simultaneously.

The IASB was first known as the International Accounting Standards Committee
(IASC) which was formed in 1973 in London. The IASC endeavourer to become a
part of International Federation of Accountants (IFAC), an international organisation
for professional accountants (IFAC 2014).

International Financial Reporting Standards (IFRS) are a set of international

accounting standards stating how particular types of transactions and other events
should be reported in financial statements. IFRS were established in order to have a
common accounting language, so business and accounts can be understood from
company to company and country to country. IFRS are sometimes confused
with International accounting standard (IAS), which are the older standards that IFRS
replaced. IAS was issued from 1973 to 2000, and the International Accounting
Standards Board (IASB) replaced the International Accounting Standards Committee
(IASC) in 2001.

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 REYNOLD INTERNATIONAL PEN COMPANY

Reynolds’s is an American international pen company started on July 18; 1945.The

headquarters of Reynolds is in New York, USA. Reynolds was founded by American
businessman Milton Reynolds.

(Wikipedia 15/04/2018)

Property, plant and equipment

IAS 16,

The recognition of PPE in Reynolds

 Property, plant and equipment are initially recognized at cost.

 Cost includes all expenditure directly attributable to bringing the asset to the location
and working condition for its intended use.
 Cost includes the estimated cost of dismantling and removing the asset and restoring
the site.

Depreciation

 Property, plant and equipment are depreciated over its expected useful life.
 Estimates of useful life and residual value, and the method of depreciation, are
reviewed as a minimum at each reporting date. Any changes are accounted for
prospectively as a change in estimate.
 No specific depreciation method is required. Possible methods include the straight-
line method, the diminishing-balance (or reducing-balance) method, the sum-of-the-
units (or units-of-production) method, the annuity method and renewals accounting.
The use of the revenue-based depreciation method is prohibited.

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Intangible asset

IAS 38
Reynolds amortizes an acquisition-related intangible asset that is subject to amortization over
their estimated useful life. Acquisition-related in-process R&D assets represent the fair value
of incomplete R&D projects that had not reached technological feasibility as of the date of
acquisition; initially, these are classified as in-process R&D and are not subject to
amortization. Once these R&D projects are completed, the asset balances are transferred from
in-process R&D to acquisition-related developed technology and are subject to amortization
from this point forward. The asset balances relating to projects that are abandoned after
acquisition are impaired and expensed to R&D.

Reynolds performs a quarterly review of significant finite-lived identified intangible assets to

determine whether facts and circumstances indicate that the carrying amount may not be
recoverable. These reviews can be affected by various factors, including external factors such
as industry and economic trends, and internal factors such as changes in Reynolds’s business
strategy and the forecasts for specific product lines.

References:

Wikipedia

Advanced financial reporting study text, Kaplan, 15/04/18

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