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Company’s Financial Analysis

2) The financial performance for the company is very good in terms of profitability and efficiency in the use of assets.  However it has deteriorated with regards to the financial year 2000. The three main ratios that were calculated were the efficiency ratios, the profitability and the liquidity ratios, which show a worse picture for the company over the two year period.

Profitability

A rights issue of share refers to an offer of ordinary shares to existing shareholders in proportion to their shareholdings which requires cash subscription. In other words, these shares are offered to ordinary shareholders with respect to their present shareholding in return for cash. For e.g. the company may make a rights issue of one for four basis at 150 p. a shareholder who owns 16 shares in the company may buy 4 shares ( one share for every four) at the price of 150 p each. If the shareholder purchases the shares, his ownership in the company will increase to 20 shares, enabling him to earn higher dividends. In turn the company receives cash. As compared to the above, a rights issue of shares is a less costly mode of raising finance. However, the company must be careful while setting its price. A too high price may actually lead to less capital raised where as a too low price may lead to dilution of earnings.

Raising funding though preference shares is the same as raising funding through ordinary shares. However the rights associated with preference shares are different. Preference shares do not have ownership rights and preference shareholders may not receive dividends when the financial position of the company is bad, unlike debenture holders. However cumulative preference shares are an exception to the rule. Moreover, raising funding through preference shares does not restrict the borrowing power of the business as it is not tied to the value of assets. The implication for the company of using this source of funding is that it lowers its gearing ratio (unless it is redeemable), and it enables the company to secure a relatively less risky form of capital.

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