Research Report: Accounting and Finance Project

Research Report: Accounting and Finance Project
11/04/2011 Comments Off on Research Report: Accounting and Finance Project Academic Papers on Business Studies,Sample Academic Papers admin

Chapter 1: An Overview of the Research Report

1.1 Introduction

It was time when it takes months and years just to transfer news from one distant place to another and the people have to wait for a long time. One good thing was that the completion was a local phenomenon and demands and expectations of the stakeholders were not very high. But now the world has completely changed with respect to means of transportation and communication. Rapid advancement in information technology and globalization has made it possible for a company to go for outsourcing, making production, assembling and packing site at different sites of the world and selling it around the globe. In this world of fierce competition, a company has to generate higher earnings and speedy cash flows, not only in books of accounts but also in the world of reality. It is the cash flow which is the real test of the performance of the company. The speed of these cash flows is also important as the early receipt and delayed payment of cash provide company an important opportunity to pursue more profitable investment options and generate further cash inflows. Cash flow which is generated by the firm and paid to creditors and shareholders’ come from three important sources.

  • Cash flow from operations.
  • Cash flow from changes in fixed assets.
  • Cash flow from changes in working capital (Ross, Westerfield and Jaffe 2002)

Out of these three areas, cash from operations is the most important as it is the cash flows used up or generated from operating activities, which is the main business activity of the company. The financial managers emphasise more on cash flows and the timing of cash flows than the earnings of a company as cash flows reflect a more solid financial position of a company for a specific period of time. The very survival and future of a company is dependent not only on its ability to generate profits but the conversion of these profits into cash. The ratio analysis of the financial reports reflects the financial condition, position and performance of a company and its management, considerably but not completely. Out of all these financial statements the statement of cash flows is of prime important because it shows the cash inflows and outflows of a company which is the clear indicator of liquidity and solvency. In finance the value of the firm is determined by its ability to generate financial cash flow (Ross,Westerfield and Jaffe 2002). These cash flows are further discounted to know the exact value by incorporating the time and interest rate factor in it.

The researcher will apply this technique of discounted free cash flow (DFCF) to the two real world companies of construction industry, which are Hong Kong public limited companies, Hong Kong (HKC) Holdings Limited and Cheung Kong Holdings Limited), to find out the exact value of their stocks. Once the real value of the shares is determined, it is easy to separate the factor of speculation in the price of shares and help the investors with more confidence.

This research will be based on a case study approach in which the researcher will first find free cash flows (FCF) from the financial statements and then discount them back by weighted average cost of capital (WAAC) to know the exact value of stock of the company. It is important to note that financial experts now a day’s pay greater attention to the free cash flow at hand to know that the financial health of the company rather than the accounting returns.

The researcher will also try to analyze the impact of current economic downturn on the construction industry on worldwide and specially in Hong Kong, the impact of new projects undertaken by the company and its growth potential. The objective of looking at the case from all these angles is to reach at a conclusion which is more authentic and close to the reality.

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