Consultancy Report

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Consultancy Report

Executive Summary

In this report, the major emphasis is on Midas Touch Technology Ltd (MTT) which produces smartwatches and the other party to the case is VCI – Victoria Capital Investment Ltd provider of venture capital. The report initiates with the venture capital requirement followed by the argument that whether the entire amount should be raised by the VC. Then, the alternative to equity finance is discussed. Further, in the report, the funding requirement of MMT together with its financial position is ascertained and discussed.

Introduction

Midas Touch Technology Ltd (MTT) is a producer of high-end smartwatches by utilization of premium materials together with third-party software. It intends to enhance the operations and take a leap. To give effect to this idea, it approached Victoria Capital Investment Ltd (VCI). VCI is a venture capitalist firm situated in London. The Venture capitalist funds new operations and the report will shed light on the funding aspects of the company. VCI before investment would stress various factors so that it is completely aware of the pros and cons of MTT. Hence, the report will shed light on the venture capital concept together with different alternatives that MTT can avail for raising funds. Debt and equity capital can be thought of as the capital structure of the MMT which is decided by the management and the board of directors together. In the case of the equity investors, it is seen that they will receive a part of MMT’s earnings in exchange for some financial support they provided to MMT (Bodie et. al, 2014). In some cases, equity capital originates with angel investors, venture capital firms, or venture capitalists. Private equity firms, institutional investor-pension funds, or insurance companies are the main sources of accumulating capital for MMT (Ferris et. al, 2010).

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The capital once invested as equity has no botheration for eagerly demanded payments and so it does not increase the trouble of fixed costs or payments in terms of MMT. The revenue which arises from the equity capital can be postponed and invested in business expansion or other things as and when demanded.

A permanent source of finance

The permanent solution means equity financing in terms of the financial demands of MMT. It is not all possible for a company to pay full attention to financial management. A product manufacturing company will think of producing a high-quality product and reaching its customers while a service provider company will pay attention to delivering high-quality services. Equity financing is the key that provides the power to keep aside finance issues and concentrate on their top priorities (Berk et. al, 2015). It frees the management of the trouble to acquire funds over and over again. Raised debt is paid back after a random period.

Open chances of borrowing

The financial power ratio can be seen in cases of companies that are heavily financed by equities. The financial power ratio calculates the ratio of financing to equity and debt. It is mandatory for the investment funds to be 20%-25% from the company itself and the rest can be equity as in the case of a bank or other financial institution. Companies with low debts have better chances of acquiring funds when the company demands some investment (Shah, 2013).

There is no need to keep anything as security while acquiring equity capital. The current running business of MMT can itself serve as the security for the provided investments. It is also possible for MMT to keep the assets bought from the borrowed capital as security, in case of a long-term loan fixture (Christensen, 2011).

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Long-term financing

It is seen that the equity firm is more concerned with increasing the value of the business and is not at all in a hurry to grab its given loan in the form of dividends or payments. They have a simple formula to get back their invested capital with higher interests and to eliminate the causes in which they would never come back and so they are in no hurry to get paid in exchange (Guerard, 2013).

Covenant free financing

Repayment of the loans is the main concern of a lender who thinks that the loan should be utilized in such a way to generate lots of revenue which will ensure his repayment as soon as possible, and that is why there are boundaries within which this money is used. In the case of equity, there are no such boundaries as they depend on the government to protect their interests (Porter & Norton, 2014)

No dividend

The most important thing for a new company is equity finance. A new company is always concerned with the matter of funds and this equity finance outlasts to back off the pressure from the company with no trouble in payments related to dividends. It is for the company to choose to pay no dividends or smaller dividends as per their financial conditions (Da et. al, 2012).

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Retained earnings

It is seen that MMT has a perfect source of equity finance on its hand with provides it with funds. Other take-up projects and investments can be easily made with the revenue generated from the investment of the equity. This ensures that the management is free of the pressure of collecting funds again and again. It is also seen that if any taken up projects land sup to provide more wealth than the current dealings then the MMT will be appreciated by the equity firm for the objective completion of “wealth maximization”.

Disadvantage

Expectation of investors

Profits, dividends, and business growth are all uncertain in the case of equity investors. Uncertainty also prevails in the case of debt lenders but not as much as in the case of equity. This can also be understood as the reason that equity investors expect more returns than the lenders

Business form requirements

In the case of equity financing also, there can be some legal restrictions that the MMT has to follow. It is seen that the dividend raised by the equity is grabbed on by the equity firm and can be distributed or dealt with as they may seem right. During the election of the board of directors, it is important to consider the thinking of the equity firm. Equity investors can also pass approval in important business decisions. All the above factors decrease the owning power and increase the errors of the management decisions

Underwriting of shares

The underwriter is demanded when the equity shares are on sale. The underwriter would assume the risk involved. The underwriter would plan the subscriptions and will charge a fee for that which may be given as payment or as discounted equity share price.

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Financial Returns Distribution

Right on the generated cash flow is common for all investors. MMT distributes its net proceeds because the company is old and has grabbed again in the sales. An investor gets a raised price in exchange for the invested price which is lower than the provided amount. Also, legal restrictions on the equity capital dominate the return provided to the investor (Volcker, 2012).

Dilution of control Equity financing loosens the grip and decreases the percentage of shareholding due to increased shareholders which is not at all seen in the case of debt financing.   Debt funding has an advantage. Suppose a project returns 12% while debt costs are 8% then this 4% benefit will be provided to the existing shareholders but if this was as per equity then the benefit would have passed to shareholders (Wagenhofer, 2014)

Alternative to Equity Financing – Joint Ventures

Advantages & Disadvantages

A business owned and made functional by two parties is known as a partnership. A joint venture can be thought of as the same with much more advantages and also disadvantages. Advantages involve ease of plan-making and expanding the business. Disadvantages can involve conflicts which are generally due to a lack of personal asset security.

Opportunities for a new business can arise in the field of the joint venture which previously couldn’t be thought of. Also when a company ties up with another then it reduces the weaker company’s burden.

Investment in finance, time, and supply is important in a business. Entering into a venture means dividing these with other parties who can have key contacts who can tackle the loopholes involved in the business which would have been suffered by one company alone previously (Merchant, 2012).

The restricted time limit is a boon for the companies in a venture if they don’t want a long-term partner. Also, the profits are divided by mutual consent and if one wants to leave the venture then it is welcomed.

Operational Strategy And Financial Analysis

Taxes

Advantages of joint venture involve taxation also. This happens because the partners are not allowed to file tax which is done in the case of a business owned by a single person. Both the partners have to file individual income tax returns which include their profits or losses. Losses shown in tax files can be counterbalanced by the company’s profits (Scapens, 2012).

Joint Venture Cons

A joint venture has a fixed time limitation restricting it to extend for too long. A partnership is a case where both parties work for the highest business success. In a joint venture, one party can leave the treaty and operate their own business.

Difficulties can arise if two parties agree to plan something for a venture. Also if two parties with different business types engage in fro venture then miscommunication and a clash of ideas can be seen. Both parties should work intelligently with the proper planning of the venture.

Conflicts and disputes

Conflict is the major disadvantage of the joint venture. They may not agree on how to take up projects or how to expand the business or ideas about future undertakings. Though a written legal agreement can be signed disputes can happen anytime in a joint venture. A written agreement is advised without which a whole lot of loopholes exist that can cause major and disastrous conflicts between partners (Petty et. al, 2012).

Part – B

Management

It is genuine for a smart investor to take management as the main consideration while making any decisions regarding investment in Midas Touch Technology Ltd (MTT). Before making any investment, VCI analyzes its management team and the ability of the firm to do business (Peirson et.. al, 2015). They have no consideration for “green” managers, but they are searching for suitable owners of businesses who have successfully established their place in the market and have also provided their investors with good returns.

Midas Touch Technology Ltd (MTT) should provide the venture capital investment with a list of its best employees. If it has no talented managers then it should try and hire some from outside as according to the VCI they will never invest in a business that is managed by inexperienced managers but they would easily invest if the business is not stable but is managed by accomplished managers.

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Size of the market

Midas Touch Technology Ltd (MTT) should try and make large business targets that may help and attract VCI investors. For VCI, “large” means a business that can acquire revenue of more than $1 billion. They need huge returns for the investment they make for which they make sure that the companies have a future chance of growing sales that are worth hundreds of millions. The bigger the market size, the bigger the chance of increased sales which may attract VC investors. The business will grow fast enough in a big market and thus attract investors.

VCI also asks for a detailed analysis of the market in which Midas Touch Technology Ltd (MTT) works. They ask for an analysis that is presented in the form of “top-down” and “bottom-up” which means that the third party reports should also be given. Also, the review of customers and feedback from the potential buyers should be provided (Brigham & Daves, 2012).

Great production with a competitive edge

The VCI investors look for a business that has great products and services to offer its customers. They look for a firm which has solved a very wanted requirement of the public or it has a wide variety of products at low range. The firm should have either the lowest price or it should sell a product that a person can’t resist buying.  Midas Touch Technology Ltd (MTT) produces high-end smartwatches using premium materials and third-party software which is very attractive to the customers to buy. They need a complete advantage market and also a portfolio with great sales and fewer competitors operating in the same market.

Assessment of risks

The VCI wants to analyze every aspect of a company so that it can know about any prevailing risks that may hamper the future sales of the firm. When they analyze the portfolio, then they need to know what the company has achieved in the past years and what it is going to achieve in the future. Some factors that are looked after are:

  1. Any problem with the legality of the product
  2. The value of the product in the future market
  3. The availability of funds to meet requirements
  4. The eventual exit and the possible returns

There are various other methods or considerations taken by VCI to decide whether they will invest in that particular business or not. They look after the types of funds and individuals which may affect the business but in the end, they just need big returns from the investments (Choi & Meek, 2011).

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The bottom line

The VCI for an investment of £10 million should analyze the firm and then make a decision. The firm Midas Touch Technology Ltd (MTT) produces high-end smartwatches using premium materials and third-party software which is pretty good in the market. Although even the firm has suffered a loss in the past years, it is looking forward to having a great business with huge profits in the upcoming future years. The rewards of a successful, huge return investment can be damaged by money-losing investments. So before making any decision about the investment opportunities, VCI should analyze the firm’s data thoroughly and then make the decision. They should know about the management, the d=size of the market, an operation to be undertaken, and the expected returns from the business to successfully invest in a business with less risk.

Financial Status and funding demand of MMT

MMT is engaged in the production of high-end smartwatches by utilizing premium materials and third-party software. The investment that it wants to fetch from VCI comes to £10 million. Going by the status of the company on a worldwide basis, it can be said that the product is pending worldwide and outsourcing is done for the manufacturing. Since it has approached VCI, the financial status of the company needs to be ascertained. The revenue of the company in 2015 stands at £936K in the initial year by trading through the sale of the main product. However, going by the initial year of the company it can be commented that the company will either break even or will incur a loss. The company incurred a loss of £674K.  However, MMT planned to design a new product, and for the investment of £10 million, it approached VCI (Carmichael & Graham, 2012). Going by the trend of the market and forecast, the estimated sales is expected to enhance to £9,830 million in 2019

 

2015

2016

2017 2018 2019

2020

Gross Margin

(115)

41 2140 5167 12354

25,500

Profit After Tax

(674)

(5544) (700) 1446 4139

10808

Sales Revenue

936

2898 7728 15456 32472

62400

Going by the funding requirement of MTT, the following three factors need to be considered. The sales revenue is one of the important factors that drive the business and hence, before funding any business the forecasted sales must be ascertained.  As per the global demand of the MTT, it can be seen that the projected sales revenue stands at a very position.  The sales figure has enhanced. The increment in the projected sales is an indication that the company will hit a major number owing to its high demand. By 2020, the sales figure is expected to touch 62400£K. Going, by the projected sales figure, the approach of the company to raise an amount of £10 million is highly justified.  The growth of the industry is expected to hit £9,830 million in 2019. Hence, the funding demand of the company is justified and VCC can fund that amount as it is a profitable venture.

Secondly, the gross profit needs to be observed. The gross profit indicates that the company incurred a loss in the year 2015 when the gross loss was booked. However, the projected gross profit has increased tremendously. It is owing to a huge increment in the forecasted sales. When the gross profit is high it means the company has performed effectively (Parrino et. al, 2012). Therefore, gross profit is another indication that strikes the fact that the company will fetch strong numbers in the upcoming years and hence, is a strong bet.

Lastly, the net profit is observed, and going by the calculations, it can be commented that the net profit till 2017 is negative because when the company starts operations it has to settle some of its expenses. The company needs to tame the expenses in the forthcoming years which can be done easily. The operating expenses are always high in the initial stages of the company, however, with time, the company tends to have control, and hence, MTT forecasted net profit grew after 2017.

Moreover, the cash flow from operating activities is negative till 2017 owing to a negative net profit. However, after 2017 there is a positive projected cash flow. This indicates that the business will perform effectively in the long run and hence, should be financed.

Poter’s Five Forces Model

Conclusion

The overall discussion provides a strong statement that the operations of the MTT are strong and going by the expected cash flow, sales, and profit, the company is expected to perform strongly.  The long-run attributes of the company stand strong and hence, it is ideal for investment. In the long run, the company will fetch huge advantages and will reap profits. VCC can invest in the company going by the financial status of the company.

References

Berk, J., DeMarzo, P. & Stangeland, D 2015,  Corporate Finance,  Canadian Toronto: Pearson Canada.

Bodie, Z., Kane, A. & Marcus, A. J 2014, Investments,  McGraw Hill

Brigham, E. & Daves, P 2012, Intermediate Financial Management, USA: Cengage Learning.

capital: Interpreting the empirical evidence,  Journal of Financial Economics vol. 103, pp. 204–220

Carmichael, D.R. & Graham, L 2012,  Accountants Handbook, Financial Accounting, and General Topics, John Wiley & Sons.

Choi, R.D. & Meek, G.K 2011,  International accounting,  Pearson.

Christensen, J 2011,  ‘Good analytical research’, European Accounting Review, vol. 20, no. 1, pp. 41-51 https://www.researchgate.net/publication/227613941_Good_Analytical_Research

Da, Z., Guo, R.J. & Jagannathan, R 2012, ‘CAPM for estimating the cost of equity

Ferris, S.P., Noronha, G. & Unlu, E 2010, ‘The more, merrier: an international analysis of the frequency of dividend payment’, Journal of Business Finance and Accounting, vol. 37, no. 1, pp. 148–70.

Guerard, J. 2013, Introduction to financial forecasting in investment analysis, New York, NY: Springer.

Merchant, K. A 2012, ‘Making Management Accounting Research More Useful’, Pacific Accounting  Review, vol. 24, no.3, pp. 1-34.

Parrino, R., Kidwell, D. & Bates, T 2012, Fundamentals of corporate finance, Hoboken, NJ: Wiley

Peirson, G, Brown, R., Easton, S,   Howard, P & Pinder, S 2015, Business Finance, 12th ed., North Ryde: McGraw-Hill Australia.

Petty, J. W,  Titman, S., Keown, A. J., Martin, J. D., Burrow, M & Nguyen, H., 2012, Financial Management: Principles and Applications, 6th ed., Australia: Pearson Education Australia.

Porter, G & Norton, C 2014, Financial Accounting: The Impact on Decision Maker, Texas: Cengage Learning

Scapens, R.W 2012,  Commentary: How important is practice-relevant management accounting research? Qualitative Research in Accounting & Management, vol. 9, no.3, pp. 293 – 295.

Shah, P 2013, Financial Accounting, London: Oxford University Press

University Press

Volcker, P 2011,  Financial Reform: Unfinished Business, New York Review of Books.

Wagenhofer, 2014, The role of revenue recognition in performance reporting, Oxford University Press

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