On the other hand, loan capital is a borrowed fund that has a fixed interest which a company should pay no matter its financial conditions. Aztec would enjoy several advantages from raising fund from the share capital. First, the company will be able to raise cheap fund from the public making the company to pay only dividend to shareholders which is just a little percentage from the company net profits. Moreover, the risk of losing capital is spread on large number of people and not just founders of the company. More importantly, shareholders are likely to regards their shares as long-term investment thereby stick to company in a good or bad time. The only shortcoming of share capital as source of fund is that the larger percentages of shares should not be in possession of external investors because possession of larger percentages of shares will make external investors to have great influence on the company. (Danielson, and Scott 2006)

By relying on loan capital, Aztec Catering may increase its overall leverage which may make the company to face the risk of long-term debt financing consequent leading to the risk of bankruptcy.

Thus, the paper provides the 3-year financial plan to assist the company to meet its corporate objectives. The projected profit and loss table reveals that the Aztec will record net profits of £37 Million in 2013, £47 Million 2014 and £81 Million 2015. Based on the data presented in the company-projected balance sheet, the company total assets will be £522 Million in 2013, £555 Million in 2014, and £620 Million in 2015. The total assets include the current assets, non-current assets, equipment, building and land. The financial plan will assist the company to achieve the following corporate objectives:

To maintain a profit margin of 24%

To maintain current strong financial position of the company

"To satisfy the shareholder by maintaining a dividend payout ratio of 50%"

Aztec Projected Profit and Loss (£000)

31/12/2013

31/12/2014

31/12/2015

Revenue

Gross revenue

£120 000

£150 000

£190 000

Cost of goods sold

10 000

10 200

10 608

Gross margin

£110 000

£139 800

£179 392

Other revenue [source]

£0

£0

£10 000

Interest income

$1 000

£0

£0

Total revenue

£111 000

£139 800

£189 392

Operating expenses

Sales and marketing

£10 000

£10 200

£10 608

Payroll and payroll taxes

15 000

£15 300

£15 912

Depreciation

8 000

8 100

8 500

Insurance

8 500

£8 670

£9 017

Maintenance, repair, & overhaul

1 500

15 300

15 600

Utilities

2 500

£2 550

£2 652

Property taxes

3 000

£3 060

£3 182

Administrative fees

2 000

£2 040

£2 122

Other

4 000

£4 080

£4 243

Total operating expenses

£54 500

£69 300

£71 836

Operating income

£56 500

£70 500

£117 556

Interest expense on long-term debt

3 590

2 866

2 106

Operating income before other items

£52 910

£67 634

£115 450

Loss or gain on sale of assets

0

0

1 000

Other unusual income expenses

0

0

0

Earnings before taxes

£52 910

£67 634

£116 450

Taxes on income

30%

15 873

20 290

34 935

Net income (loss)

£37 037

£47 344

£81 515

Dividend

£18,518.5

£23,672

£40,757.5

Retained profit

£18,518.5

£23,672

£40, 757.5

Aztec Caterings Projected Balance Sheet (£000)

Assets

Initial balance

Year 1

Year 2

Year 3

Cash & short-term investments

£30 000

£100 559

£141 801

£214 855

Accounts receivable

3 000

3 000

3 000

3 000

Total inventory

27 000

27 000

27 000

27 000

Prepaid expenses

0

0

0

0

Deferred income tax

0

0

0

0

Other current assets

Total current assets

£160 000

£230 559

£271 801

£344 855

Buildings

£100 000

£100 000

£100 000

£100 000

Land

Capital improvements

0

0

0

0

Equipment

Less: (Accumulated depreciation expenses)

0

8 000

16 100

24 600

Net property/equipment £300 000

£292 000

£283 900

£275 400

Goodwill

$0

$0

$0

$0

Deferred income tax

0

0

0

0

Long-term investments

0

0

0

0

Deposits

0

0

0

0

Other long-term assets

0

0

0

0

Total assets

£460 000

£522 559

£555 701

£620 255

Liabilities

Initial balance

Year 1

Year 2

Year 3

Accounts payable

£2 000

£2 000

£3 000

£3 000

Accrued expenses

0

0

0

0

Notes payable/short-term debt

0

0

0

0

Capital leases

0

0

0

0

Other current liabilities

60 000

60 000

60 000

60 000

Total current liabilities

£0

£62 000

£63 000

£63 000

Long-term debt derived from the loan payment calculator

£40 000

£65 522

£50 320

£34 358

Other long-term debt

Total debt

£102 000

The paper applies shareholder value analysis (SVA) to estimate whether the investment will increase the shareholder value. The shareholder value suggests a decisive measure that a company employs to enrich shareholders. Within financial environment, the idea of shareholder value shows that shareholders' money should be invested wisely to generate higher rate of returns for shareholders. Based on the decision of Aztec Catering to invest its non- current assets and its working capital in the next three years, the paper uses discounted cash flow (DCF) and net present value (NPV) to determine whether the investment will increase shareholders value. The main advantage of using NPV technique is its strong correlation with shareholder value. Since the major objective of a company is to maximise shareholder wealth. Thus, NPV is a powerful tool to evaluate a project. (Afonso, 2009).
Cash Flow and Net Present Value

As being presented in the cash flow table, the company cash balance at the end of the fiscal years 2013, 2014, and 2015 will be £101 Million, £142 Million, and $215 Million respectively. The paper also calculates the cost of capital using weighted average cost of capital (WACC) and the calculation is as follows:

Cost of Capital= k (1-T)

Where k= Interest Rate

Where T= Tax Rate

Interest Rate= 10%

Tax Rate=30%

Cost of Capital = Interest Rate (1- Tax Rate)

Cost of Capital =10%( 1-30%)

Cost of Capital=7%

Using the data in the cash flow and the cost of capital, the paper calculates the NPV of the Aztec proposed investment to determine whether the investment will increase the shareholders value.

Aztec Catering Cash flow (£000)

2013

2014

2015

Operating activities

Net income

£37 037

£47 344

£81 515

Depreciation

8 000

8 100

8 500

Accounts receivable

0

0

0

Inventories

0

0

0

Accounts payable

0

1 000

0

Amortization

0

0

0

Other liabilities

0

0

0

Other operating cash-flow items

0

0

0

Total operating activities

£45 037

£56 444

£90 015

Investing activities

Capital expenditures

£0

£0

£0

Acquisition of business

0

0

0

Sale of fixed assets

£0

£0

(£1 000)

Other investing cash flow items

0

0

0

Total investing activities

£0

£0

(£1 000)

Financing activities

Long-term debt financing

£25 522

(£15-202)

(£15-962)

Preferred stock

0

0

0

Total cash dividends paid

0

0

0

Common stock

0

0

0

Other financing cash flow items

0

0

0

Total financing activities

£25 522

(£15-202)

(£15-962)

Cumulative cash flow

£70 559

£41 242

£73 053

Beginning cash balance

£30 000

£100 559

£141 801

Ending cash balance

£100 559

£141 801

£214 855

Discounted Cash Flow

£77,353.3

£83,906

£97,795

Net Present Value (£000)

Year

Cash-in

Net Cash Flow

Discounted Cash Flow

0

-90,000

-90,000

-90,000

1

100,559

100,559

77,353.3

2

141,801

141,801

83,906

3

141,801

141,801

97,795

Net Present Value.

£63.7 Million

Using discounted cash flow to calculate the net present value, the net present value is £63.7 Million because the present value of the expected cash flow is £153.71, which is larger than £90 million invested in the project. The investment will increase the wealth of shareholders because the returns of the investment are greater than the actual funds put in the project.

Conclusions

Appraisal carried out on Aztec corporate objectives reveals that the company needs to rely more on share capital than raising fund from the bank loan. The financial plan carried out will assist the company to meet its corporate objective. More importantly, the cash flow and net present value are used to determine whether the proposed investment will add value to shareholder. Investment appraisal carried out reveals that the net present value is greater than one showing that the present value of the expected cash flow is greater than the actual fund invested in the project making the paper to recommend that the company should pursue the project.

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