Be sure to save an electronic copy of your answer before submitting it to Ashworth College for grading. Unless otherwise stated, answer in complete sentences, and be sure to use correct English, spelling, and grammar.
Liquidity Ratios
Sources must be cited in APA format. Refer to the Format Requirements? page for specific format requirements.
Refer to the Metropolis Health System (MHS) case study in Chapter 28.
Set up a worksheet for the liquidity ratios.
Compute the four liquidity ratios using the Chapter 28 MHS financial statements
Johnson and Johnson Inc. requires more financing to support research and development. The company operates in an industry that needs constant innovation to respond to emerging complexities in treating various diseases. Therefore, investment in research and development will ensure new pharmaceutical products and medical equipment are developed. Additionally, the investment will ensure that the company remains relevant and competitive. Funding investment into research and development will entail self-funding and borrowing. The two funding sources have various requirements, as analyzed in the following section.
The Sources of Funding.
Self-funding refers to using capital from the companys retained earnings to support investment activities. Self-funding only requires the approval of the board of management after considering the proposed investment activity. On the other hand, borrowing entails acquiring a long-term loan from a lending institution such as a credit institution or bank. Essentially, this funding option contains various requirements that Johnson and Johnson Inc. has to consider. First, borrowing requires collateral that stands for the amount borrowed. When the company fails to repay the loan, the collateral will be sold to recover the amount. Second, the company will require a positive credit standing to acquire a sufficient loan to support the intended project (Wasiuzzaman & Nurdin, 2019). Fortunately, Johnson and Johnson Inc. has a high rating in credit standings.
Associated Risks of these Funding Sources.
The two funding options identified have risks the company should consider before obtaining them. There is minimal risk regarding self-funding because the option has no liability. However, the same cannot be said for the borrowing option. This is so because borrowing risks the companys assets that will be used as collateral. If the company fails in its obligation to repay the loan, the assets will be confiscated. Additionally, the company risks obtaining a negative credit record if a default occurs when fulfilling the obligation. Also, loans consume the companys capital in terms of interest repayment. The loan repayment includes interest charges that negatively influence the companys overall cash balance.
Sources that Best Fit this Company
Considering the two options, self-funding is identified as the best option for funding their research and development programs. The selection of this option is based on the risks and requirements that the company needs to consider before adopting the option. As compared to the borrowing option, self-funding has minimal costs and risks. Additionally, Johnson and Johnson Inc. has a huge capital in their retained earnings that can be used to fund the intended project. In the fiscal year that ended in 2021, the retained earnings figure for the company was $17,941,000 (Yahoo Finance, 2022). Essentially, this proves the companys ability to consider self-funding as the best alternative.
The Cost of Capital for Both Short-Term and Long-Term Funding Sources
The cost of the funding strategy is represented by Johnson and Johnsons Inc.s weighted cost of capital. The minimum rate of return that investors will expect for their investment in the company is referred to as the weighted cost of capital. It also describes the typical rate the company is predicted to pay its stockholders. For the most recent fiscal year, Johnson & Johnson Inc.s weighted cost of capital was 6.1%. (GuruFocus, 2022). Because the self-funding approach was chosen, the WACC figure already accounts for its cost of capital as part of the total variable equity. It should be noted that this represents the expected cost of capital for both the long and short terms. The estimated APRs for the corporation for the previous four years are shown in the table below.
Wasiuzzaman, S., & Nurdin, N. (2019). Debt financing decisions of SMEs in emerging markets: Empirical evidence from Malaysia. International Journal of Bank Marketing, 37(1), 258- 277.
Your company wants to acquire more funding and will need a business case to do so. This business case will be featured in your financial plan, which you will create next week. To get yourself prepared for developing the financial plan, create an outline of your business case in which you do the following:
Business Case Research-Johnson& Johnson
Determine why funding is needed for the company.
Determine the sources of funding. Consider self-funding, borrowing, equity, venture capital, etc.
Evaluate the requirements of each funding source you determine appropriate.
Analyze the associated risks of each funding source.
Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information.
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The internal and external business environment of TransGlobal Airlines is analyzed using the PESTEL analysis tool. Notably, it is an acronym for political, economic, sociological, technological, environmental, and legal factors (Çitilci & Akbal?k, 2020). The analysis is given below.
Political
The industry is one of the USs most taxed and regulated sectors. Several political factors influence the operations of companies involved in this sector, including TransGlobal Airlines. However, trade restrictions are the single selected political factor in this case. It entails the political process which influences policy formation. Politicians are actively involved in the formulation and passage of trade restriction laws. They are more likely to influence the decision to areas of favour or trade restrictions that favour their interests. For instance, restrictions on mergers and acquisitions will affect Transglobal Airlines decision to acquire two airlines. For example, the approval by government officials for a merger or take-over of airlines is influenced by legislators.
Economic
Economic conditions influence the operations of a company in various ways. For instance, changes in global economic conditions influence the aviation industry. According to Atems (2021), the economic downturn resulting from the global COVID-19 pandemic adversely affected the sector and reduced its worth from $810 billion in 2019 to $688 billion in 2020. As a result, the acquisition of two airlines by Transglobal Airlines will enhance the companys economic welfare because it will increase its synergy amid high inflation rates.
Sociological
Issues related to demography influence the aviation industry. Demographic characteristics influence the spending of individuals in the industry. One sociological factor selected is the age of the target markets. Notably, the age of individuals affects the frequency of travel. People between 20 and 50 trip more than other ages; thus, the company must focus its marketing activities on this notable age group. Further, accessing this market segment will entail a marketing plan based on the features desired by the social group.
Technological
Factors associated with technology consider innovation and inventions that affect business. Mobile technology is such a factor that is selected for Transglobal Airlines. Notably, through mobile apps, this technology has changed TransGolabals customer support and bookings. The company must ensure it is up to date with technological developments to remain competitive. Using mobile application technology cuts costs for the company and makes it more efficient in generating profits.
Environmental
Concern for natural environment protection and sustainability influences the operations of airline companies. One such factor is pollution. Airplanes are often associated with air pollution. As a result, airline corporations, including Transglobal Airlines, must ensure they use clean energy and reduce their footprint on the natural environment.
Legal
Legal factors pertain to what is allowed and disallowed in the performance of a business. One factor under this category that influences the activities of TransGlobal Airlines is labour laws. Labour laws must strictly be adhered to avoid lawsuits that can be expensive for the company in the long run. Notably, the company should ensure timely contracts for its workers and fair pay failure, to which action from the government and labour unions can be sparked.
References
Items, B. (2021). The response of the US aviation industry to demand and supply shocks in the oil and jet fuel markets. Transportation Research Interdisciplinary Perspectives, 11, 100452.
Çitilci, T., & Akbal?k, M. (2020). The Importance of PESTEL Analysis for Environmental Scanning Process. In Handbook of Research on Decision-Making Techniques in Financial Marketing (pp. 336-357). IGI Global.
In your role as controller of a division of TransGlobal Airlines, you are responsible for assessing the possible acquisition of the two identified small airlines in the Caribbean specializing in chartered flights for luxury vacations using light aircraft (60 passengers or less).
Business Environment Analysis
One of the critical steps in this acquisition process is analyzing, understanding, and identifying all the external and internal elements that can affect the organizations performance, and, as businesses are greatly influenced by their environment, all the situational factors that determine how day-to-day circumstances impact firms. You can assess situational factors by performing a business environment analysis. The analysis considers the threat or opportunity level these situational factors might present. These evaluations are later translated into the decision-making process. The study helps align strategies with the firms environment. You will use the PESTEL method to perform this analysis.
Prompt
Use the information provided to you in the TransGlobal Airlines Information document to perform a business environment analysis using the PESTEL method. Your task is to analyze the internal and external business environment of TransGlobal Airlines by identifying the impact of each PESTEL factor on the business environment.
Specifically, it would be best if you addressed the following rubric criteria:
Identify one political factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
Identify one economic factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
Identify one sociological factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
Identify one technological factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
Identify one environmental factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
Identify one legal factor that can affect the companys business environment and explain any potential impact on acquisition strategy.
