Capital Budgeting of Triton

Company 1

Capital Budgeting of Triton Company

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 Capital Budgeting of Triton
Company 2
Table of Contents
Executive Summary...............................................................................3
Introduction............................................................................................4
Effects on value Added Items.................................................................4
Viability Analysis of Pipes Division and Bathroom Division.....................7
Financial Gearing based on a Payback Period........................................8
Factors that influence the Payback Period............................................10
The Importance of Strategic Aim..........................................................11
Financial Ratio Analysis and Budgetary Controls..................................12
Management Accounting Functions and Ethical Issues........................13
Conclusion............................................................................................14
References...........................................................................................15
 Capital Budgeting of Triton
Company 3

Executive Summary

Capital budgeting (CB) is a success factor for most organization

in the world. For this reason, this report is about capital budgeting of
Triton Company. An analysis of the importance of CB is vital for the
well-being of the company as it faces serious recession problems.
Since the company is fighting to come to recover from its recession,
there are various issues on board that ought to be considered before it
fully regains is the previous status. This paper evaluates the
importance of financial ratio and budgetary instruments as decision-
making tools for Triton Company. How the capital budgeting it critical in
managerial accounting is also on board in the project.
 Capital Budgeting of Triton
Company 4

Introduction

Capital budgeting is considered as the best decision-making tool

because it has great benefits for organizations such as Triton
Corporation, it is also used for future importance for various
stakeholders and entities. It is considered as the foundation of
managerial accounting and economics. In private companies, the term
is used exclusively to infrastructure investment based on world
economies (Baker, Dutta & Saadi 2010). It is properly related to policy
decisions that have value to long-term impacts on the company,
especially decisions about products, missions, processes and process
that can help Triton to make decisions based on the current world’s
financial crisis or financial downfall.
There are various solutions to the existing type of capital
budgeting problems such as buy or make decisions, project selection,
and investment in the division with fluctuating rates of production,
level maintenance decisions, investment in working capital and the
choices of mutually exclusive investments (Baker, Singleton & Veit
2010). Besides, the same calculations of benefits that come from
capital budgeting analysis of Triton help in guide policy decisions with
both short-term and long-term consequences. Therefore, this paper will
discuss managerial accounting of Triton Company with references to
capital budgeting; the aim for this is to offer the company and decision
platform about it undertaking concerning the current recession faced
by the company.

Effects on value Added Items

Capital budgeting is not only related to decision making but also

the structures that ought to be used to make the analysis efficient and
elaborate. Capital budgeting, in this case, refers to the ways Triton
Company finances its assets via a combination of debt and equity as
 Capital Budgeting of Triton
Company 5
well as evaluation of value added it’s from all the divisions to come up
with the best decision on which division to hold dear and which to
improve. The firm’s valued added structure is the composition of its
structures of liabilities (Baker, Singleton & Veit 2010). According
to Modigliani-Miller theorem such a capital market is considered as a
perfect capital market (it has no bankruptcy and no transaction costs
or expenses leading to perfect information. This means the value
added for car accessories and industrial services, the divisions can
borrow at the same interest with all the others. This means that both
the taxes and the investment decisions will not be affected by the
financial or accounting decisions that the manager will take. Both Miller
and Modigliani have two diverse findings related to the value added
items from both car accessories and industrial services that are
considered to be the only two product divisions with low value added
costs (Baldvinsdottir, Mitchell & Nørreklit 2010)). First, this means that
the value of the company cannot be considered independent of its
capital structure hence, may lead to low profitability to the company as
well as reduce the cost of business. Secondly, with the low value added
of the two product divisions, the cost of equity for Triton is equal to the
cost of equity; this means that there will be an added premium for
accounting risks that the company faces.
When leverage increases in the divisions, the burden of
individual products are shifted between different investor classes, the
total risk will eventual be added and conserved hence there will be no
extra value added. Under normal or classical tax system, the reduction
of tax of interest will make debt financing very easy and valuable to
Triton. This means that the cost of capital will decrease while the same
proportion of value added for pipe and floor board products will
increase rapidly. The optimal capital budget structure will mean that it
will have virtually no equity at all making it less valuable to the
 Capital Budgeting of Triton
Company 6
business (Baldvinsdottir, Mitchell & Nørreklit 2010)). This means that
with the low rate of value added there is an expectation that the
business would not be profitable especially when dealing with products
such as pipes, floor board, and electrical products. Under such
situation, it is important to consider that the capital structures is
important when determining the Triton's performance from a finance
perspective. The project examines the value added of all the products
to determine the ones that are low and high hence able to come up
with the decision to determine the ones that are profitable or
competitive in nature. Valuable theories such as Trade-off theory and
pecking order theory explains that a company of Triton standard is not
expected to have such a low value added to its products hence there is
a high risk that the company will be running to liquidity soon (Cinquini
& Tenucci 2010).
Trade-off theory deals with financial returns and profitability
costs, it states that there is a gain of financing with debt, this means
that with benefits from revenue and taxation, the cost of financing
seems to be cost effective for the company. On the other hand, the
managerial benefits increases as the debt increases, likewise, the
marginal cost increases leading to a high value added to the products
(Cinquini & Tenucci 2010). Thus, Triton will be able to optimize its value
added on the trade-off on choosing how much to invest on each of the
products in order to come up with the right product that will be able to
bring high returns to the business. This means that to get the best
returns; the company must be able to come up with the best debt-to-
equity ratio. Besides, the debt-to-equity ratio is dependent on the
industrial characteristic and varies along with the products that the
company provides (Cohen & Zarowin 2010).
On the pecking order theory, the company should be able to
prioritize, their financial sources to maximize it profits and reduce
 Capital Budgeting of Triton
Company 7
products value added (from internal financing to equity financing).
According to the law of least effort or the law of least resistance, there
is the need to have low value added so that the management could be
able to know the loopholes that exist in business (Cohen & Zarowin
2010). This is considered as one of the measures that promotes the
understanding of the organization when it comes to profitability. Hence,
the products low value added means that the company should use
internal funds to clear all bad debts; since this is the best sources of
profit making for the company.
Low added value is chiefly related to conflicts between
stockholders and the shareholders of companies of firms. First, as the
D/E ratio reduces, the management of Triton will be able to increase its
incentives to support risky products (Cohen & Zarowin 2010). This is
because, if the products with low added value are successful, the
company will be able to maximize it profits, whereas, if the
organization is unsuccessful, the organization will get the downside of
business. This is considered as the first line implication of low added
value of pipes, floor boards, and electrical products. If the products are
diverse, there is a higher probability of firms value added decreasing
as well as the transfer of wealth from stockholders. Secondly, when the
value added of the above products is risky, the gain from the business
will increase; hence, the management has to come up with incentives
to disapprove or reject, NPV products, despite the fact that there can
increase the firm's value added ).

Viability Analysis of Pipes Division and Bathroom Division

A large amount of Long-term viability debt and equity is used to

determine Triton viability report by using Excel function. The results are
indicated in the below table. For example, the debt to equity ratio
during that year was 0.34 which is calculated by 2802/12900.
 Capital Budgeting of Triton
Company 8
Debt-Equity Ratio
Current
　
Year
Total Long Term Debt 2802
Value of Equity 11800
Debt-Equity Ratio 0.34228
In order to indicate Triton long-term viability financing methods,
the above table shows analysis of long-term financing ratios. Triton is
currently using funds issuing products from the two divisions among
others. The company believes that their ability to come up with enough
cash to be able to sustain the industry’s operating functions and
activities is considered as one of their fundamental financial
capabilities. They expect cash flows from all the operating activities to
be currently high as well as in the future; however, this is considered
so if the company can reduce expenses concerning the two divisions;
considered as the main divisions of the company (Khamees, Al-
Fayoumi & Al-Thuneibat 2010).
This means that if the manager sells the two divisions, there are
high chances that the company will not be able to raise enough cash or
finances to sustain its operations. Triton expects to meet all it financial
commitments as well as operation needs and demands for the future if
the two divisions are sold. Besides, it expects to use capital generated
from activities of the other divisions to run the entire company.
However, it is will be difficult for the company to be able to meet these
needs because the company will be selling its two main divisions to
raise capital to run the others.
From the analysis, it is evident that all the divisions have been
using debt financing to meet their operational needs. Triton maintains
its divisional debt levels because they consider it as prudent based on
cash flows, percentage of debt (Loan) to capital and interest coverage
ratio. The company also use debt financing to lower their overall cost
of capital, which increases their return on equity. As of the end of the
 Capital Budgeting of Triton
Company 9
year, Triton long-term debt was considered as A+ by Poor’s and
Standard and AaS by Moody. On the other hand, the commercial paper
can be considered as “A-1” and “P-1” by Moody and Standard & Poor’s
(Lemmon & Zender 2010). Tritons Divisions loan management policies
should be in conjunction with their purchase and repurchase programs
and investment activities be-cause if this is not the case it can result
more than current assets and current liabilities.
Payment of debt comprises of both long-term and short-term
financing activities that would be able to change the perception of the
weaker divisions. For example, the company had $48 million in lines of
debt and other short-term related credit capital, this means that more
than the same about of capital was outstanding. This means that the
company is not able to keep with the current trend or operations if the
two divisions are sold and re-purchase of other divisions are not in
place. It is also believed from the analysis that the other remaining
divisions are not able to sustain loan financing among other valuable
undertaking of the company. Therefore, it is considered that selling of
the two divisions is not a viable decision was taken by the company
but a collapsing strategy by the firm.

Financial Gearing based on a Payback Period

The table below shows the aggregate investment obligation of

Triton from 10k and also indicates the company’s financial method that
includes, short-term loans and other investment on tax credit analysis.
Initial Investment
Investment $10,000
- Tax Credit $4,000
Net Investment $6,000
+ Working Cap $30,000
+ Opp. Cost $2,484
+ Other invest. $0
Initial Investment $38,484
 Capital Budgeting of Triton
Company 10
This part of the capital budgeting analysis shows the
consolidated financial statements regarding loan or debt management
and payable investment values. Upon payment of all the outstanding
finances projected and the sale of the two divisions as projected in part
two of this project, lines of credit and other long-term and short-term
borrowing are evident. It is clear that the company is not able to keep
with the current finances considering that it has a fluctuation on the
current liquidity needs especially and pipe and floor boards divisions.
To determine the best financial gearing on a payback period, it
will be wise to undertake several alternatives. First, the use of cash
flows will be considered as the primary analysis method and analysis of
all long-term financial obligations of the company. When the estimated
payment periods was considered the following was used: term debt
and fixed-rate debt. The interest based on the applicable financial rate
and payment dates were calculated to determine the payback period
(Lemmon & Zender 2010). For the case of the variable rate of loan
repayment of the company or the non-term debt, estimation payment
dates and interest rates were determined. A determination of the most
likely cases of each of the debt tools or instruments were used. From
the above it was clear that the financial gearing of the company was
unfavorable hence there was the need for outside funding. According
to the analysis, this is expected to take a longer pay-back period of
more than four years.
The sales and purchase obligation of the divisions comprise of
the agreement to the purchase of services as well as goods that are
legal and enforceable and that speculate all the important terms of
sale, such as open purchase orders and long-term contractual
obligations. From this, it is evident that the payback period should be
extended from the anticipated one offered by the company so that the
company could be able to meet its cur-rent needs and demand.
 Capital Budgeting of Triton
Company 11
Thus, Triton has used varied sources to be able to finance its
operations and activities yet it has not been able to meet it expected
objective as a company. First, they're main funding source if there
operating cash from the divisions (Lukka & Modell 2010). Triton is
strongly evident from the analysis that this is the primary source of
income for the company. Other sources are short-term borrowing as
well as long-term debts. For example, in the current year, 2014, the
company earned $15 million before tax; considered as a recession in
comparison to another year between the 1990s and 2000s. Besides, a
debt of $48 million is also evident. It means that the company had to
use debt to manage the recession hence it has a long way to go when
it comes to the clearing of the loan or debt and to fully finance its
operations; this calls for more years.
Lastly, looking at the changes in Triton’s financial strategy in the
long-term, the long-term debt to Equity ratio had reduced between the
1990s and 2000s so does to 2014. Since then, the ratio is considered
to have changed in diverse ways. The variance between the long-term
debts (loan) to Equity can be explained by the decrease in the financial
of the divisions such as Pipes, bathroom accessories and industrial
services (Lukka & Modell 2010). In 2014, the company increased its
long-term debt by 30%. According to Triton, this shows that the
company has declined business outcomes or results hence better
capital management strategies need to be considered over a four
years payback period.
Despite the fact that there are significant changes in the long-
term equity management of the company, there is the need for
elaborate modernization of the company. It is expected from the
analysis that the company needs more financial assistance from loans
to be able to change the divisions to operational standards. This means
that value addition has to be on board on the following factors:
 Capital Budgeting of Triton
Company 12
Factors that influence the Payback Period

First, repayment of short-term and long-term debts payment

period is vital. The company should be able to evaluate the success
rate of being able to repay its debts. It is considered important to
determine this year before coming up with the best strategies to
modernize the programs used by the organization. Repayment of
debts is very important be-cause it determine the company’s credit
worthiness hence a vital step towards it success.
Secondly, valuation of operating capital. It is important to
consider that the company’s operating income or capital should be
evaluated to set up the best payback period for the company. This will
be able to indicate the exact value added for the products. Also, it will
also indicate the best framework to be used in an equity investment of
the company. From this, the best payback period will be denoted the
wellbeing of the company hence during the recession period.
Lastly, change status of the firm is important. It is considered
that the change status of the company is vital when it comes to
determining the payback period. In his case, if the Triton’s
management is not ready for change then there will be a longer
payback period as compared to when the company is ready for a
change.

The Importance of Strategic Aim

Optimal capital structure

 Capital Budgeting of Triton
Company 13

With a financial gearing percentage of 17.70%, there is need to

consider that the manager should be able to use the figure to
determine the success of the company out of the recession period.
Furthermore, the strategic finance states that the firm capital structure
is unique and relevant to the cost of the firm. This calls for re-
examining the type of assets that the firm owns to come up with the
best decisions concerning its success. The table below offers a clear
and valuable information concerning the importance of strategic
reduction of financial gearing. The composition of strategic tangible
and non-tangible assets is important in this analysis as below:

Name of Assets 2014

Trademarks with
2,090
indefinite lives
Good will 1,090
Other Intangible Assets 1,000
Percentage in Total 18.25
Assets %
Ratio of Intangible to
1:5.85
Tangible

Note: (units in million except the percentage)

 Capital Budgeting of Triton
Company 14

Clearly, the above table indicates that there is the need for
strategic aim because the intangible assets play a vital role among all
the Tritons assets. This means that if the company does not take a
strategic aim approach, then it might lose most of these assets
knowing that value added of the products do not meet what is needed
in the market. Also, since the company is struggling to come out of the
recession, it is also important that such indications on a percentage of
assets are evaluated (Shinoda 2010). Secondly, it is agreeable that
Triton is not specialized. This is one obvious thing that is figured out
from the analysis making it one of the best when it comes to
determination of the best fit strategic aim of the company. The
divisions do not have enough tangible and intangible assets to
overcome the current recession facing the company; hence, it is vital
to consider strategic aim option to get the best results. Therefore, it
can be deduced that strategic of reducing financial gearing should be
on board for the success of the company and that investment in
modernization of programs such as those of tangible assets such as
equipment should be encouraged.

Financial Ratio Analysis and Budgetary Controls

Besides the expected costs that the company is yet to face to

only in the payment of workers but also to other departments, it is wise
for the manager not to consider laying off the 20 employees. The firm's
cost of Human Resource is also a factor that should be considered by
the company’s management for decision making concerning the
capital structure of the firm. Thus, it is wise to consider the budgetary
control and ratios that the company should have and what are the
values that come with the use of the ratios (Ger-vais 2010). It is
considered that Triton is not a large public traded company that uses
 Capital Budgeting of Triton
Company 15
bonds and stocks for its financing needs, but such case cannot be
ignored based on the current recession state of the company. Ratio
analysis is important for the business to be able to come up with the
decision such as that of laying off staff.
Ratio Analysis Table of Triton Company

Market Capitalization: 314B

Price / Earnings: 35.3
Price / Book: -265.0
Net Profit Margin (mrq): 7.2%
Price To Free Cash Flow (mrq): -102.5
Return on Equity: 15.1%
Total Debt / Equity: 0.9
Dividend Yield: 3.0%
The D/E ratio of the company is considered reasonable when making
decisions for the company; hence, the manager should consider that
such financial ratios and budgetary controls are important for the
success of the company. On the other hand, the return on equity is
also favorable making it a clear undertaking of how the organization
operates hence valuable to the manager’s decision making about
decentralization programs (Gervais 2010).

Management Accounting Functions and Ethical Issues

According to the company’s operations, the organization ought

to have a team of experts who should be mandated with accounting
functions as well as other ethical issues within the company. This is
done to make sure that the company can meet it current and future
ethical and managerial objectives. Ethical issues in the organization
should be handled with care because it could be the cause of the
company’s financial demise (Lukka & Modell 2010). Besides, the
success of the company is also dependent on value addition based on
management accounting function. Therefore, the two should be posted
on an institution within the organization.
 Capital Budgeting of Triton
Company 16
Conclusion

Based on the above analysis, Triton should apply trade-off theory

because it has some advantages of normalizing value additions and
formulating of better strategic aims. However, the company has a
problem with the high cost of debt, and this problem has to be fixed
before the company runs to deeper cases of liquidity or recession. It is
expected that the value added of the most division will increase rapidly
in the future. However, it is recommended that Triton has to introduce
more innovative products to foster rapid expansion. By doing so, there
will be an increase in the NPV (Net Present value) in investment. Value
added of most of the divisions is low hence measure have to be taken
to diversify the divisions so as to increase specialization and division of
labor.
 Capital Budgeting of Triton
Company 17

References

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Corporate Finance: Bridging The Gap Between Theory and
Practice. Oxford University Press.
Baldvinsdottir, G., Mitchell, F. & Nørreklit, H., 2010. Issues in the
relationship between theory and practice in management
accounting. Management Accounting Re search, 21(2), pp.79-82.
Cinquini, L. & Tenucci, A., 2010. Strategic management accounting and
business strat egy: a loose coupling?. Journal of Accounting &
organizational change, 6(2), pp.228-259.
Cohen, D.A. & Zarowin, P., 2010. Accrual-based and real earnings
management active ties around seasoned equity offerings. Journal
of Accounting and Econom ics, 50(1), pp.2-19.
Gervais, S., 2010. Capital budgeting and other investment decisions.
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Khamees, B.A., Al-Fayoumi, N. & Al-Thuneibat, A.A., 2010. Capital
budgeting prac tices in the Jordanian industrial
corporations. International journal of commerce and
management, 20(1), pp.49-63.
Lemmon, M.L. & Zender, J.F., 2010. Debt capacity and tests of capital
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Lukka, K. & Modell, S., 2010. Validation in interpretive management
accounting re search. Accounting, Organizations and Society, 35(4),
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 Capital Budgeting of Triton
Company 18
Shinoda, T., 2010. Capital budgeting management practices in Japan: a
focus on the use of capital budgeting methods. Economic Journal of
Hokkaido University, 39, pp.39- 50.