Analysis of Zircon Cars Company - Essay Example

April 21, Zircon_Cars Introduction Zircon Cars is contemplating on reducing its production costs. The paper delveson whether it is beneficial to acquire the Korean Composites Company. The paper focuses on the financial analysis of acquiring the same Korean company. The financial analysis indicates it is feasible to acquire the Korean_Composites entity. Loan Computation Table 1 Korean Composites Loan Computation The above table 1 shows the effect of Zircon’s acquiring the Korean_Composites Company for the maximum amount offered by its owners. The owners’ maximum offer is only 35,000,000 Korean Won currency. The above 10 year debenture loan table shows Zircon Cars will enter into a ten year 35,000,000 Korean Won currency loan (Chapman, 2011, p.698). The loan interest is 7 percent. The loan installments will be paid at the end of every year starting in 2016. The yearly principal payment is 3,500,000 Korean Won currency. The yearly interest charge will be 1,483,212.60 Korean Won currency. Table 1 a Loan Interest Formula The above table 1a shows formula for computing the annual interest payments. P represents the principal loan amount (Brigham & Houston, 2011, p. 82), 35,000,000 Korean Won currency. I = 7%_interest. N= 10 years. The 3,500,000 Korean Won currency annual principal payment = 35,000,000/10years. The formula indicates the annual payment is 4,983,212.60 Korean Won currency. Annual interest = total annual payment – principal payment. Annual interest = 4,983,212.60 - 3,500,000. The annual interest is 1,483,212.60 Korean Won currency. Table 2 Korean Composites Income Statement (2016 to 2018) The above table 2 shows the income statement of Korean Composites from 2016 to 2018. Zircon Cars acquires the Korean Composites company by paying the owners’ offered 35,000,000 Korean Won currency amount. For 2016, the Korean company’s 1,000 fibre body_shell total global sales will generate 48,140.000 Korean Won. The company’s projected 2017 revenues will increase by 5 percent from the prior year’s sales figure. Consequently, the 2017 sales, 1,050 cars, will generate 52,063,410,000 Korean Won currency amount total global sales. The company’s projected 2018 revenues will rise by 5 percent from the previous year’s sales figure. Consequently, the 2018 sales, 1,102 cars, will generate 56,281,042,052 Korean Won currency amount total global sales (Needles et al., , 2010. P. 148). Further, the same table 2 shows the company’s increasing fixed costs for the three year period. The 2016 fixed cost amount is 15,404,800 Korean Won currency amount. The 2017 fixed cost amount is 16,660,291,200 Korean Won currency amount. The 2018 fixed cost amount is 18,009,933,456.64 Korean Won currency amount (Wickramashinghe, 2012,p.168). Furthermore, the same table 2 shows the company’s rising variable costs for the same three year period. The 2016 total variable cost amount is 23,107,200,000 Korean Won currency amount. The 2017 total variable cost amount is 24,990,436,800 Korean Won currency amount. The 2018 total variable cost amount is 27,014,900,184.96 Korean Won currency amount (Parrino et al., 2012, p. 5). Moreover, the above table 2 shows the depreciation expense is pegged using the straight line method. Under the method, the depreciation expense is evenly distributed during the life of the asset. From 2016 to 2022, the depreciation expense amount remains at 4,300,000 Korean Won currency amount. The depreciation expense reduces the net income output (Parrino et al., 2012, p. 5). Using the same table 2, the current interest_charges are recorded evenly every year. Under the method, the company pays equal interest_charges for its previously acquired loan amounts. From 2016 to 2022, the current interest_charges depreciation expense amount remains at 510,000 Korean Won currency amount. The interest charges lessen the net income output (Berry, 2011, p.6). Further, the same table 2 shows the company’s total costs and expenses amount. For 2016, the total costs and expenses figure is 38,518,293,212.60 Korean Won currency amount. For 2017, the total costs and expenses figure is recorded at 41,657,021,212.60 Korean Won currency amount. For 2018, the total costs and expenses figure reached 45,031,126,854.20 Korean Won currency amount (Eherhardt, 2011, p.115). Furthermore, the same table 2 shows the company’s increasing net income before tax amount. The 2016 net income before tax amount is 9,621,706,787.40 Korean Won currency amount. The 2017 net income before tax figure is 10,406,388,787.40 Korean Won currency amount. The 2017 before tax output is 11,249,915,197.80 Korean Won currency amount (Wickramashinghe, 2012, p.168). Based on the same table 2, the company is scheduled to pay its annual Korean tax for the same three year accounting period. The 2016 tax figure is 2,328,453,042.55 Korean Won currency amount. The 2017 tax payable figure is 2,518,346,086.55 Korean Won currency amount. The 2018 tax figure is 2,722,479,477.87 Korean Won currency amount (Kieso et al., 2011, p.995). Table 3 Korean Composites Income Statement (2019 to 2022) The above table 3 shows the annual interest payment for the 35,000,000 Korean currency loan amount paid to the company’s owners during the acquisition. Zircon Cars pays the 10 year loan by submitting 3,500,000 Korean Won Currency amount for every year starting in 2016 and ending in 2025 (Jain, 2010, p. 32). The above table covers only the seven year accounting period. The seven year accounting period financial analysis is enough to convince the readers of this paper that it is beneficial to acquire the Korean Composite Company at the Korean owner’s offered 35,000,000 Korean Won currency figure. In exchange for the 35,000,000 Korean Won currency amount, Zircon’s acquisition of the Korean entity generates net profits before tax amount (Ross, 2011, p.79) The above table 3 shows the income statement of Korean Composites from 2019 to 2022. The company’s projected 2019 revenues will skyrocket by 5 percent from the prior 2018 year’s sales figure. Consequently, the 2019 sales, 1,157 cars, will generate 60,862,686,591.46 Korean Won currency amount total global sales. The 2020 sales, 1,214 cars, will generate 65,776,940,853.67 Korean Won currency amount total global sales. The 2021 sales, the company’s 1,214 cars will generate 71,098,696,315.49 Korean Won currency amount total global sales. The 2022 sales, the company’s 1,337 cars will reach 76,853,002,890.91 Korean Won currency amount total global sales (Brigham & Houston, 2011, p. 118). The same table shows the company’s fixed costs continue to increase annually (Berry, 2011, p.103). Furthermore, the same table 3 indicates the Korean company’s growing variable costs for the same four year period. The 2019 total variable cost amount is 29,229,870,727.23 Korean Won currency amount. The 2020 total variable cost amount is 31,572,931,609.76 Korean Won currency amount. The 2021 total variable cost amount is 34,127,374,231.43 Korean Won currency amount. The company’s 2022 total variable cost figure is 36,889,441,387.64 Korean Won currency amount (Parrino et al., 2012, p. 11). Further, the same table 3 indicates the Korean Composite Company’s total costs and expenses amount. During 2019, the total costs and expenses figure is 48,722,744,424.66 Korean Won currency amount. For 2020, the total costs and expenses amount is placed at 52,627,845,895.53 Korean Won currency amount. For 2021, the total costs and expenses amount reached 56,885,250,264.99 Korean Won currency amount. During 2022, the total costs and expenses figure is placed at 61,488,695,525.33 Korean Won currency amount (Eherhardt, 2011.p. 115). Furthermore, the same table 3 shows the company’s increasing net income before tax amount. The 2019 before tax amount is 12,173,819,590.41 Korean Won currency amount. The 2020 net income before tax amount is 13,149,094,958.13 Korean Won currency amount. The 2021 net income before tax output is 14,213,446,050.50 Korean Won currency amount. The 2022 net income before tax output is 15,364,307,365.58 Korean Won currency amount (Eherhardt, 2011, p.115). According to the same table 3, the Korean Composites entity will religiously pay its annual Korean tax for the same four year accounting period. The 2019 tax figure is 2,945,822,340.88 Korean Won currency amount. The 2029 tax payable amount is 3,182,080,979.87 Korean Won currency amount. The 2021 tax amount is 3,439,653,944.22 Korean Won currency amount. The 2022 tax figure is 3,718,162,382.47 Korean Won currency amount (Ross, 2011, p.79). Further, the 2016 to 2022 forecasted income statements (Table 7) affirm the company will generate £ 65,326,551,719.65 total after tax net_income will easily persuade the banks to approve Zircon’s 35,000,000 Korean Won currency loan. Both the approved loan and the profitable 2016 to 2022 total net profits after tax amounts surely eliminates any limitations to the instantaneous acquisition of Korean Composites company, raising Zircon Car’s overall global revenues and net profits (Wickramashinghe, 2012,p.168). Table 4 Zircon Income Statement (Before Korean Composites acquisition) The above table 4 shows the Zircon Cars United Kingdom market segment income statement the acquisition of the Korean Composites Company (Eherhardt, 2011, p.115). Based on the Zircon’s Balance Sheet net income, £ 22,620,000, the estimated revenue for 2014, 20 percent net profit on the 2014 year’s sales, is £ 113,100,000 amount. The company’s 2014 total manufacturing cost, £ 64,336,000, represents 70 percent of the total cost amount. The total cost and expense amount is £ 63,336,000 amount. The amount is arrived at by generating the total cost and expense figure for the 2014 year, £ 90,480,000 amount. The £ 9,500,400 amount represents the 15 percent Korean body shell cost of production figure for each Zircon Car. The other manufacturing cost of the United Kingdom Zircon cars is £ 53,835,600. Table 5 Zircon Income Statement (After acquisition of Korean Composites) The above table 5 shows the Zircon Cars United Kingdom market segment income statement after the acquisition of Korean Composites Company (Parrino et al., 2012, p. 5). The above table shows the Zircon’s Balance Sheet net income favourably increased to £ 22,857,510. In order to show the effect of the Korean Composites Company acquisition’s 2.5 percent discount, the estimated revenue for 2014 remains at £ 113,100,000 amount. The company’s 2014 total manufacturing cost is 63,098,490. The total cost and expense amount is£ 90,242,490. The £ 237,510 discount is deducted from the £ 9,500,400 amount represents the cost of purchasing the Korean body shell cost of production figure for each Zircon Car. The other manufacturing cost of the United Kingdom Zircon cars remains at the same £ 53,835,600 figure. Analysing, the above table 4 and table 5 show one of the many benefits of acquiring the Korean Composite Company. The table 4 shows the company’s net profit prior to the acquisition of the Korean entity is only 22,620,000 Korean Won currency amount. After the purchase, table 5 shows the company is able to receive the 2.5 percent discount on the Korean fibre body shell part. Consequently, the company’s Zircon Cars United Kingdom market segment net income is increased by the allowed discount, 237,510 Korean Won currency amount (Jain, 2010, p. 25). Table 6 Combined Financial The diversification finance concept dictates it is advantageous to invest in several market segments, including investing in the new Korean fibre body shell market segment. On market’s profitability will reduce the risk of losses in another market (Brigham & Houston, 2011, p. 82). The above table 6 shows the combined financial report for two segments (Eherhardt, 2011, p. 115). The combined report is based on the 2016 accounting period. The United Kingdom is one of the chosen Zircon Cars market segments. Another segment is the Korea Composites global fibre body shell market segment. The above table 6 shows the United Kingdom Zircon Cars market segment sales is £ 113,100,000. The same table shows the Korean Composites global fibre body shell market segment generated 48,140,000,000 Korean Won Currency amount. The same table shows the conversion or translation of the Korean currency to the United Kingdom currency, British Pound. The sales amount of the Korean Composites Company for 2016 is £ 28,407,548.59. Combining the 2016 accounting period sales of both the Zircon Cars’ United Kingdom market segment and the Korean company’s sales, the total sales figure is £ 141,507,548.59. Further, the above table 6 shows the United Kingdom Zircon Cars market segment net_income before tax deduction is £ 22,857,510. The same table 6 shows the Korean Composites global fibre body shell market segment produced 9,621,706,787.40 Korean Won Currency amount net_income before tax deduction amount. The same table shows the same conversion of the Korean currency to the United Kingdom currency, British Pound. The net_income before tax deduction of the Korean Composites Company for 2016 is £ 5,677,796,796.08. Combining the 2016 accounting period net_income before tax deduction of both the Zircon Cars’ United Kingdom market segment and the Korean company’s sales, the total net_income before tax deduction amount is £ 28,535,306.08 (Eherhardt, 2011, p.115). Furthermore, the above table 6 shows it is very advantageous to acquire the Korean Composites Company. The acquisition of the Korean fibre body shell production company increases the Zircon Car’s overall global sales figure. The same acquisition affirms acquiring the Korean fibre body shell production company boosts the Zircon Car’s overall global net_income before tax amount (Eherhardt, 2011, p.115). Table 7 Korean Composites Income Statement (2016 to 2022) Moreover, the above table 7 shows the Zircon Car Company is able to profit from the 35,000,000 Korean Won currency acquisition of Korean Composites. For the 10 year loan amount, the company pays 10,382,488.20 Korean Won currency interest charge. In exchange for the interest charge, the company generates 65,326,551,719.65 net_income after tax Korean Won Currency figure. Clearly, it is best for the Zircon Car Company to immediately accept the Korean owner’s 35,000,000 Korean Won currency acquisition offer (Brigham & Houston, 2011, p. 82). The risk/return_tradeoff finance concept shows the 35,000,000 Korean Won currency loan will easily generate returns, eliminating the risk of not paying the loan amount on time (Brigham & Houston, 2011, p. 82). The asset allocation (diversification) concept affirms investing in the new Korean Composites market segment distributes the assets in order to reduce risks (Brigham & Houston, 2011, p. 445). The dollar averaging cost finance concept espouses purchasing the Korean entity reduces the company’s production costs, specifically the fibre body shell parts (Brigham & Houston, 2011, p. 364). Conclusion Summarizing, the above discussion shows the effect of accepting the Korean owner’s 35,000,000 Korean Won currency acquisition offer for the Korean Composites Company to reduce Zircon Car’s manufacturing costs and expenses. The 35,000,000 Korean Won currency amount loan used to acquire the Korean fibre body shell entity can be easily recovered. In exchange for the 14,832,126 Korean Won currency ten year loan interest charge, the company is able to generate 65,326,551,719.65 after tax net_income during the 2016 to 2022 accounting periods and 2.5 percent fibre body shell discount, 237,510 Korean Won currency amount. The combined United Kingdom Zircon Car market revenues and the Korean Composites Company’s global fibre body shell market segment generated a favourably higher combined £ 141,507,548.59 sales figure and higher net_income before tax deduction, £ 28,535,306.08 figure. The 2016 to 2022 projected income statements indicating the company will generate £ 65,326,551,719.65 total after tax net income, persuading banks to grant Zircon’s 35,000,000 Korean Won currency loan. Evidently, the above financial analysis validly proves acquiring Korean Composite Company at the Korean entity owner’s offered acquisition price, 35,000,000 Korean Won currency profitably generates favourable return on investment results. References: Berry, L., 2011, Financial Accounting Demystified, London: McGraw-Hill Press. Brigham, E., Houston, J., 2011, Fundamentals of Financial Management, London: Cengage Learning Press. Eherhardt, M, 2011, Financial Management, London: Cengage Learning Press. Needles et al., 2010, Financial & Managerial Accounting, London: Cengage Learning Press. Jain, K, 2010, Management Accounting, London: McGraw-Hill Press. Kieso et al, 2011, Intermediate Accounting, London: McGraw-Hill Press. Parinno, R., 2012, Fundamentals of Corporate Finance, London: J. Wiley & Sons Press. Ross, S, 2011, Mathematical Finance, Cambridge: Cambridge University Press. Wickramashinghe, D, 2012, Management Accounting, London: Routledge Press. Read More