Saturday, March 7, 2020
Financial report on luton brickworks Plc. The WritePass Journal
Financial report on luton brickworks Plc. Introduction Financial report on luton brickworks Plc. IntroductionWhat is Dividend?Types of Dividends:CASH DIVIDEND:STOCK DIVIDEND:STOCK SPLITS DIVIDEND:SHAREHOLDERS WEALTH MAXIMIZATION:ARGUMENTSDIRECTOR A:Formula for Walter’s model:Arguments in favour of statement:Arguments against the statement:DIRECTOR BAssumptions of MM modelArguments in favour of statement: (MR.B)Arguments against the statement: (MR.B)DIRECTOR CArguments in favour of the statementArgument against the StatementFACTORS DETERMINE DIVIDEND PAYMENT:FACTORS AFFECTING DIVIDEND POLICY:NATURE OF BUSINESS:COMPOSITION OF SHAREHOLDING:RESTRICTIONS BY CONCERNED BODIES:INFLATION:FIRM ORIENTED CONSIDERATION:LIQUIDITY:OWNERSHIP CONSIDERATIONS:CONCLUSION/RECOMMENDATIONSREFERENCESRelated Introduction Luton Brickworks plc is newly formed company which aims to maximise the wealth of its shareholders. The board of directors of the company is currently trying to decide on the most appropriate dividend policy to adopt for the company’s shareholders. However, there is a strong disagreement between three of the directors concerning the benefits of declaring cash dividends. Director A argues that cash dividends would be welcome by investors and that a high dividend payout ratio as possible would reflect positively on the market value of the shares. Director B argues that whether a cash dividend is paid or not is irrelevant in the context of shareholder maximisation. Director C takes an opposite view and argues that dividend payments should be avoided, as they would lead to a decrease in shareholder wealth. Required: Present the theory of organisational dividend policies and integrate the assignment into your discussion. a) Discuss the arguments for and against the position taken by each of the three directors b) Assuming the board of directors decides to pay a dividend to Shareholders what factors should be taken into account when determining the level of dividend payment. What is Dividend? The term dividend refers to the part of divisible profits among its shareholders. In other words, dividend is that portion of company’s profit which is distributed among its shareholders as a percentage of par values of share at a fixed rate per share according to the decision of its board of directors. The main purpose of any business is to create profits for its owners. When any company earns profit from its business, they can reinvest that money in their business, but some companies pay profits to its share holders. However when a company decides to pay dividend to shareholders, the cash available for business will reduce. Dividend inukare paid on a semi annual basis, net of deduction of tax at the standard personal income tax rate, these are called interim dividends. These interim dividends tend to be smaller than final dividends due to cash flow, taxation financial planning considerations (Sangray, 2010). Types of Dividends: 1)     Cash Dividend 2)     Stock Dividend 3)     Stock Splits Dividend CASH DIVIDEND: Cash dividend plays a dominant role in sharing company’s profit; shareholders are being paid in part of company’s profit. However in US they double the taxation of cash dividend at a maximum rate of 15% and dividends are distributed to shareholders only after company pays income tax. STOCK DIVIDEND: Stock dividend is paid to shareholders only if the companies not having healthy cash position, by combining the profits of both current previous year. Such shares are also called as ‘bonus shares’ instead of paying dividend as cash. There is no great change in equity of shareholders, as stock dividend is paid until actual stock sold in order to avoid paying taxes. In general share holders have more scope to receive additional shares from the company, where it depends on the amount already owned by shareholders. STOCK SPLITS DIVIDEND: Stock split dividend is performed in a company, if there is increase in share price, obviously investors shares become too expensive to buy. Whereas liabilities, assets, equity remains same. InUKstock split is referred as â€Å"scrip issue†, â€Å"bonus issue†, â€Å"capitalization†or â€Å"free issue†. This stock split dividend resembles stock dividend. Source: investopedia.com/terms/s/stocksplit.asp SHAREHOLDERS WEALTH MAXIMIZATION: Shareholders profit maximization consolidates the volume of risk time. The goal of SWM states that the present value of the expected future cash flow of the firm should be maximized to shareholders. ARGUMENTS DIRECTOR A: He argues that cash dividends would be welcome by investors that a high dividend payout ratio as possible would reflect positively on the market value of the shares. This argument deals with RELEVANCE THEORY, where the supporting model for this argument is WALTER’S MODEL James E. Walter (1999):  dividends are relevant. The investment policy of a company dividend policy both are inter-related as they cannot be separated by their own. The value of an enterprise will be affected by dividend policy. Formula for Walter’s model: P= D/Ke-g Where P= PRICE OF EQUITY SHARES D= INITIAL DIVIDEND Ke= COST OF EQUITY CAPITAL G= GROWTH RATE EXPECTED ANOTHER MODEL WHICH SUPPORTS THIS ARGUMENT IS GORDON LINTNER MODEL Dividend relevance, as argued by â€Å"Linter and Gordon†, suggested that investors preferred dividends to capital gains due to their certainty w       The Gordon model can be used to find the theoretical value of a share by summing the shares discounted future dividend payments to infinity: P0        = Do (1+g)/(y-g) Where: P0 =    current ex-dividend market price of the share r  =     shareholders required rate of return g  =    expected future growth rate of dividends D0 =    declared dividend at time t0 Dividend relevance was further supported by the argument that dividends were seen by investors as signals of a company’s future profitability. Arguments in favour of statement: 1)     The company should pay dividend to shareholders if they have sufficient liquidity to satisfy their requirements. 2)     The dividend acts as a signal to investors about the profits of the company is higher or not. 3)     The company’s market value confidence in society increase only if the dividends are paid to investors. 4)     If company pays regular cash payments to customers the firm will be recognised in the market to get financial support from other institutions with reasonable interest rates. Arguments against the statement: 1)     If the company pays dividend to investors in initial stage, it may lead to failure in important opportunities. 2)     The share value of the company decreases if the company pays more dividends to shareholders. This leads to negative impact in the market. 3)     According to nature of the business the company may suffer loss, as dividend may adversely affect the company. 4)      The regular payout of dividends will also be taxed on regular intervals, as they are corporation profits. If this profits are transferred to reserves,(capital gains) in long run, the total impact of tax would be less than the tax paid on regular dividend payments. DIRECTOR B Argues that whether a cash dividend is paid or not is irrelevant in the context of shareholders maximisation. This argument deals with IRRELEVANCE THEORY, the supporting models for this theory could be MILLER MODIGLIANI MODEL According to â€Å"Miller and Modigliani†(2010 Sudesh Sangray) the dividend payments were irrelevant should only be offered as a residual the value of a firm is unaffected by the distribution of dividends and is determined solely by the earning power and risk of its assets. The dividend policy may have no influence on the market price of the shares. Assumptions of MM model Surveillance of perfect capital markets and investors in it are rational. Securities are infinitely divisible, as there is no transactions cost, investor cannot influence the market price of securities and there are no floatation costs.  There are no differences in tax rates which are applicable to capital gains and dividends. The investment policy of a firm does not change. It implies the financial status of the company which gives an opportunity to invest in new projects. As retain earnings will not change the business risk of the firm. Arguments in favour of statement: (MR.B) 1)     Investors will not get affected if dividend is paid but investment policy will have impact on shareholders wealth maximization. 2)     The investors are less concern about dividend payment as they always want to maximise their wealth. 3)     The home made dividend pays to shareholders who expect regular income selling particular shares instead of anticipating dividend. 4)     If a company tries to get income from external source, by supplying sufficient funds, then retain earnings come completely irrelevant. Where shareholders wealth can be maximised by getting income from external source. Arguments against the statement: (MR.B) The perfect capital market is unrealistic. Practically, there are taxes, floatation costs and transaction costs. Paying present cash dividend is far better than capital gains, where whose appearance is definite more accepted by the shareholders. If a company paying dividend from external source of income is not a good idea, as it leads to increase in interest rate gearing ratio, which will effect shareholders wealth. DIRECTOR C This argument deals with which is similar to relevance theory, there is no specific model that supports this argument, but Argument for and against that Dividend payment should be avoided since it reduces Shareholders Wealth Arguments in favour of the statement Net income of the share holders decreases, as they pay taxes on dividend received. This result to decrease of wealth. The profitable opportunities for firm reduce, when there is regular payment of dividend to shareholders. So, the firm should try to avoid the dividend payment to its shareholders and try to concentrate on its investment opportunities. Argument against the Statement As mentioned by â€Å"Watson Head†(2004) in the article â€Å"DIVIDEND POLICY†cash dividend plays an important role to provide reliable information to the investors. That financial condition of company is strong. The uncertainty of shareholders income reduces when payment of cash dividend is high. The management tries to reduce conflict ensure their personal benefits are mention, as there is a scope of agency problems because of owner’s interest. There is decrease in interest rates when dividend payment is high which indicates the shareholders wellbeing is doing well by management are not. FACTORS DETERMINE DIVIDEND PAYMENT: The decision of dividend is difficult because of conflicting objectives lack of decision making techniques, maximizing shareholders wealth is not easy in the long run. FACTORS AFFECTING DIVIDEND POLICY: NATURE OF BUSINESS: Mostly dividend policy is adopted by companies which earn unstable profits; where it is different from company earn stable profits. COMPOSITION OF SHAREHOLDING: If the company have cumulative preference shares, they have to be paid the present year dividend in the next year along with next year dividend and if it has equity share they need not be paid even the company has profits. Example: Microsoft etc. RESTRICTIONS BY CONCERNED BODIES: In long-term some financial companies restrict the company on paying dividend to shareholders, they pronounced a clause that no payment to be made till the loan amount is repaid back to financial institutions. INFLATION: During inflation it is not much important to pay dividend. As there is no chance of replacing the equipment as funds are generated from depreciation. FIRM ORIENTED CONSIDERATION: The dividend policy is not determined by ownership interest rates. As firm’s needs are considered as important, this includes the following. Business cycles Risk of losing control on organization Post dividend policies and stockholders relationships. Relative cost of external funds Contractual legal restrictions Availability of external capital LIQUIDITY: As explained in Investopedia Dictionary. â€Å"The degree to which an asset or security can be bought or sold in the market without affecting the assets price. Liquidity is characterized by a high level of trading activity†. To increase the sales profits earned by company should reinvest in fixed assets working capital. There are some companies which cannot generate sufficient cash even if they get profitable income. OWNERSHIP CONSIDERATIONS: The identification of owner’s interest becomes difficult if it is decentralized on wide spectrum. As every shareholder have their own objectives different opinions. Investor companies are which combines the mix of both growth desired dividends. CONCLUSION/RECOMMENDATIONS Concluding that, this report explains the financial status of the company and their decision regarding shareholders wealth maximization. 1)     Dividend is paid to shareholders dividend policy is taken to distribute dividend to shareholders. 2)     There are 3 types of dividends cash, stock, stock splits dividend, which plays a key role in paying dividends. 3)     Paying dividend to shareholders is an added advantage, which increase the company’s reputation in the market. 4)     There is a possible adverse effect to the company depending on the nature of the business. 5)     As investors always look forward to maximise their wealth. 6)      It is not a good idea to pay dividend to shareholders now, as investors may think that the company is not having any future projects to enhance their business. 7)     Recommending that the company should wait for some time to gain good reputation in market and investors as well to get more profits, which help to increase in market share, and overall profits of the company. 8)     Concluding that as Luton Bricks Plc is new to company in market, there will have less scope for earning profits. REFERENCES DR.R.SRINIVASAN. (2009). Important theories of dividend policy an appraisal. Available: articlesbase.com/finance-articles/important-theories-of-dividend-policyan-appraisal-1353119.html. Last accessed 2nd Aug 2010. Linter. John. (1956). Distribution of income corporation among. The American Economic. 46 (2), 2-15. American psychological association. Www.dictionary.com. dividend, Collins English dictionary, 10th edition. May 22, 2011. Pike Richard. (1996). Decisions and Strategies. In: Richard Pike and Bill Neale Corporate finance and investment. 2nd Ed.New York: Prentice Hall,. 196-216. Watson, Denzil. And Head Antony(2007). Corporate finance: principles and practices. 4th ed.Harlow: ft/prentice hall. pg.no:286. Sangray, S. (2011) Week-10. Advanced Corporate Finance, Dividend Policy. (Online). Available at www.breo.beds.ac.uk.(accessed on December 10, 2010). Gitman, L., J. (2009) the principles of managerial finance. 12th ed.London: Pearson Prentice Hall. Agrawalsumeets. (2010). Theories-of-Dividend-Policy. Available: scribd.com/doc/28162428/Theories-of-Dividend-Policy. Last accessed 27 July 2011. Dictionary. (2007). Dividend. Available: investopedia.com/terms/d/dividend.asp. Last accessed 02 august 2011.
Thursday, February 20, 2020
Social psychology essays Essay Example | Topics and Well Written Essays - 4750 words
Social psychology essays - Essay Example because of technical ineptitude in the fingerprinting or DNA laboratory for example, perjured testimony, eyewitness misidentification, and also because of overzealous law enforcement officers who are eager to close the case and mete out justice. A courtroom is a place wherein many evidence are presented that are at best circumstantial and are then judged by ordinary people if it works for or against the defendantâ€â€a room wherein people not experts at lie detection weigh witness testimonies. Thus, wrongful convictions are not unexpected as the justice system is composed of imperfect human beings. Some states wherein there is a high rate of erroneous convictions have already enacted bills to address this problem. Because the United States rely on juries to ultimately decide on a person’s guilt, I believe that there should be a seminar or lecture regarding lie detection in order to minimize wrongful convictions. The jurors should be fully aware of what their decision could mean and what the evidences signify. In this way, they can create a more educated verdict. They are better equipped to intelligently weigh the evidences and testimonies that are presented during the trial. The polygraph relies on the physiological changes in the body, like pulse and blood pressure, to detect deception. It starts with a series of control questions to set the tone like â€Å"What is your name?†This is then followed by an explanation of what the polygraph is and what it does. Next comes the â€Å"stim test†wherein the person attached to the polygraph will be asked to lie so that the tester can see if the machine has picked up on this lie and is working properly. Then the test itself ensues. The questions alternate between some that are irrelevant, some control questions, and those that are relevant to the case. If the tester is not satisfied with the results, there is a post-test interview that is conducted. The polygraph has been known as the lie detector test that some highly
Tuesday, February 4, 2020
Assignment 1 Essay Example | Topics and Well Written Essays - 250 words - 13
Assignment 1 - Essay Example The falling oil prices have forced oil producers to adopt survival measures that include layoffs of many employees. Other companies related to the oil industry are also feeling the effects of the continued reduction of oil prices. Indeed, the mining and logging industry fired 3,000 employees last month (Zumbrun 1). Moreover, Schlumberger seeks to lay off about 9,000 employees since the plunging oil prices are jeopardizing production (Strauss 1). Hercules Offshore Inc is also planning to fire about 324 employees since oil producers are not willing to renew contracts for their offshore drilling rigs (Sparshott 1). Most notable U.S. economists assert that suppliers of U.S oil and gas companies will fire about 40,000 employees while equipment manufacturers could lay off 5,500 employees by December this year (Zumbrun 1). I support the need to address the issue of plunging oil prices since they threaten employment rates in U.S. In addressing the issue, U.S will safeguard the jobs at oil companies, supplying, and manufacturing companies associated with the oil industry. I am grateful of your time and continued coverage of this
Monday, January 27, 2020
Was Jonestown Murder or Suicide?
Was Jonestown Murder or Suicide? The Peoples Temple Agricultural Project came to be known to the world as the Jonestown Massacre due to the incident that occurred on November 18, 1978. The peoples temple was founded by James Warren Jim Jones however, after obtaining members, the religious organization relocated to Guyana, South America. Jones ran the site like a prison camp. His followers received little food and werent allowed to leave. Armed guards stood at the compounds perimeter. Jones often preached over the loudspeaker system at Jonestown. Fearful of a plot against him, he started conducting suicide drills. His followers were woken up in the middle of the night. They would receive a cup with a red liquid that they were told contained poison, which they were ordered to drink. After 45 minutes or so, the members were told that they were not going to die, that they had just passed a loyalty test. These drills were arguably in preparation for the real massacre, which was almost identical. In the actual massacre, v ictims had consumed a Kool-Aid drink mixed with cyanide, tranquilisers and sedatives. At the time of the massacre, the population of Jonestown had grown to approximately 900 people, over 270 of these people were children. It is still unclear whether this was a mass suicide or, if the victims were forced. The types of forensic evidence that can be gathered are; dental evidence, evidence of poisoning, bulletwound(s), fingerprints, firearms and clothing. The mass suicide/murder of The Peoples Temple members resulted in the deaths of 923 people. Autopsies were conducted on seven significant bodies via four forensic pathologists from the Armed Forces Institute of Pathology and a civilian consultant. Forensic dentistry played a big role in the identification of bodies. To identify a person from his or her teeth, a forensic dentist must have a dental record or records from the dentist of the deceased. In the case of Jonestown, or any other incident involving multiple deaths, forensic dentists receive a list of possible individuals and compare available records with the teeth and find a match; even if only a few teeth are available, a forensic dentist can still make a positive identification. The best comparisons come from x-rays, but even if those arent available, notations on the tooth cha rt can tell the dentist if the teeth are the same. The analysis and comparison of fingerprints was also a technique that was used. There are many methods and steps to analysing fingerprints, the first step is lifting a print (to take a permanent impression of the print) this is most commonly done by placing a rubber tape with an adhesive surface over a print that has been dusted with carbon black powder, once the tape is completely flat over the print it is then peeled off and placed carefully on a latent lift card for preservation. This method can, however, limit investigators ability to perform other techniques that could reveal valuable information, this is due to fingerprinting powders contaminating evidence. After fingerprinting and dentistry came pathology. The Government of Guyana began an investigation of the area of the massacre on November 20th which lasted around 36 hours. The U.S government also intercepted. The first set of bodies was taken to Dover Air Force Base in D elaware on November 23rd. An error that can be identified here is the fact that a few bodies were removed that belonged to the same family and their relationships to each other werent recorded. Once all the bodies arrived, a team of pathologists, dentists and technicians began examining them. They were examined by a group made up of of one pathologist and two graves registration technicians. It was discovered that the clothes the bodies wore had names written on them but it became obvious that the people of Jonestown often shared clothes, as some clothes had more than one name on them. This confirms that Jonestown was a communal community. Gender, age, race, hair colour and length and weight of the bodies were recorded. Most of the bodies had maggots in them because of the decomposition. The dental team helped to find out the ages of the bodies. Most of the bodies teeth were pink. The cause of this was thought to be because of cyanide poisoning every victim of the mass homicide/suicide had consumed a Kool-Aid drink laced with cyanide. The forensic evidence found was used to identify the bodies after the massacre; 666 bodies were successfully identified using the aforementioned methods, but 247 remain unidentified. An autopsy of Jones himself found he died of a fatal bullet wound behind his left temple the firearm used here was found a metre* away from Jones body. Furth ermore, only seven other bodies were autopsied which is an error as there were many more bodies which could have been examined. In conclusion, the Jonestown massacre case was not exactly solved as it is still unclear whether it was a mass murder or a suicide. Lots of evidence was recovered including dental evidence, fingerprints, gunshot wounds, evidence of poisoning, clothing and firearms. Multiple errors were made in the post-mortem investigation including the fact that family members were not kept together. This could have been stopped before the transportation of the bodies, had there been evidence suggesting a family relationship between victims beforehand. Overall, the case was arguably mishandled and abundant with mistakes and errors. Furthermore, not nearly enough evidence was gathered when considering the scale of the massacre, however, the evidence gathered did indeed further the investigation. References Goodwin, D., (2016), Fingerprint Evidence, available at: http://www.forensicequity.com/fingerprint-evidence-l2-27.html White, T. D., Folkens P.A., (2005), The Human Bone Manual Nelson, S., (2006), Jonestown: The Life and Death of Peoples Temple Moore, R., (2016), Alternative Considerations of Jonestown and the Peoples Temple, available at: http://jonestown.sdsu.edu/
Sunday, January 19, 2020
American Dream Summary
â€Å"The American Dream†There is not much left of the â€Å"American Dream†. Standard of living is declining and American parents believe that their children will inherit a very bad deal (564). Essentially, Herbert believes that Americans are in denial about how bad the economy really is. The government is not adding jobs to the economy nor are they funding public schools as they should. The government is steadily cutting back on hiring teachers and firing more to â€Å"save money†.Herbert considered research from the Pew Hispanic Center that after the Recession, which ended June 2009; the foreign workers gained 69,000 jobs while United States workers lost 1. 2 million jobs. According to Herbert, it is not that the United States should discriminate against the employment of foreign workers but they need to develop a full employment economy that provides jobs for all families to enjoy a decent standard of living (565). Herbert believes Americans should not put t heir faith into the government in order for them to live the â€Å"American Dream†.The dream will never be fulfilled (570). In â€Å"The American Dream is Over†Cal Thomas responds to Herbert’s â€Å"Hiding from Reality†. Thomas believes that Herbert did not assess who is the blame for the bad economy in America. That anyone who thinks dysfunctional government is going to help achieve their dreams is putting their faith in the wrong place (569). Although Thomas believes that the rules to achieve the American Dream can no longer be taught, he does believe that they can and will work (570). Thomas lists the rules that were known to previous generations.The rules are simple. You go to college, obtain at least an undergraduate degree, get a job/career, buy a home with a white picket fence, get married and have children, save money for your retirement and live a long prosperous life (570). The rules that Thomas noted and believes in can actually work, but ther e are some obstacles that can stand in the way of some Americans. For instance, all Americans are not able to afford college. Their parents were not able to and could not start a college fund for their children.Instead, in this bad economy, they had to choose to feed and cloth their children with not enough monies left for any type of savings, let alone for college. There are other instances where being the product of a bad environment can deter other Americans from living the â€Å"American Dream†. Some do not feel that they have the knowledge of the know how to go to college and get a job/career. They live off of their street knowledge and believe that is all they need. And being that the marriage rate in America is decreasing and the pregnancy rate in increasing, well you have a good idea about the getting married and white picket fence part.You also have other Americans that did not have any education at all. They had to go to work, with little or no education and for emp loyers that offer no benefit plan such as retirement benefits, so there goes bye to the retirement safety net. These obstacles, according to what Herbert might respond, might be overcome if the government added more jobs to the economy and provided more funding for education instead of the funding of useless wars. Herbert states the government needs â€Å"a resurrection of the American dream†(565).
Saturday, January 11, 2020
127 Hours Film Review Essay
His pain, his desire to be free and his desperation was shared with the viewers in such a way that it’s somehow disturbing. His delusions were able to reach the minds of those who watched the movie, particularly myself. In the technical aspect, it used natsot or the natural sound in most of the scenes. James Franco played Aron, an engineer who likes or rather whose hobby is to climb and hike on mountains. He is the protagonist and at the same time, the victim in the film. The antagonist here is the situation itself. It is the reason why he is in such troublesome circumstance which won’t allow him to be free. If not for his determination to live, he would not make it out alive though the process is excruciating and gruesome at some point. What strikes me the most in this film is that the director managed to make the film worth watching in 1 and a half hour with only one setting or location and focusing on one character only. Not many films can pull something like this. In regards to the content, it showed that in order to survive, you have to sacrifice something and do unimaginable things. This surprised me because it was not normal and people don’t do those kind of things. With James Franco’s acting, it made the movie a sure hit and suitable to be awarded in Oscars which it really did. The content fulfilled the expectations of the eyes, mind and soul of the movie goers. If I were the film maker, the ending would have been a sad one since I’m a fan of tragic endings. But if I do that, it will disappoint the viewers so I would make it a little less tragic. The end would be that Aron, after decapitating his arm, would not find any source of water which will make him more tired and more desperate in search of water. His long walks will continue until he finds himself in the middle of nowhere. Slowly, his body begins to collapse. He can no longer see straight due to the loss of blood. He then looks at the sky, the sun raised high, camera focused on his face. Until then, he will encounter other hikers whom will help him. At that time, he will close his eyes slowly, leaving the audience thinking whether he survived that day. Before credits roll, his picture with his family after the incident will be shown, revealing that he did survived.
Friday, January 3, 2020
Definition Of Surety Company And Bonds Finance Essay - Free Essay Example
Sample details Pages: 5 Words: 1392 Downloads: 6 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? In the construction Industry something is needed to insure the project will be complete within time, within budget and with specifications requirements. The surety bond guarantees that one of the primary parties will fulfill an obligation to an obligee, which in most cases is the completion of contract work as detailed in the contract drawings and specifications within the time frame designated by the owner. Don’t waste time! Our writers will create an original "Definition Of Surety Company And Bonds Finance Essay" essay for you Create order To guarantee that the designated work will be completed by the contractor, owners will request contractors to submit some guarantee to do finish job, this is a type of surety bond known as a bid bond. Many times the owner will also accepted a bank check for a certain percentage of the bid price at the time of bid in place of a bid bond. A surety bond is a three-way agreement involving a surety company, a project owner, and a contractor. When a surety company issues a bond to a contractor, it is transferring risk from Owner to Supplier or like Owner to G.C. and G.C. to subcontractor and subcontractor to supplier or G.C. to supplier. If the Contractor fails to perform the job to the satisfaction of the owner, then the surety will be asked by the owner to perform the work so that it is satisfactory to the owner by paying the original contractor to finish the work or hiring an outside contractor to take the place of the original contractor to complete the work. The cost incurred by the surety will be charged to the original contractor. If the contractor cannot be paid legal actions could very well be taken. Types Of Bonds: In Construction or any field there are many bond for giving surety of work. In Construction there are three types of bond which are used today. Bid Bond: Guarantees the fulfillment of an offer or bid if it is accepted Performance Bond: Surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. Payment Bond: Bond executed in connection with a contract to assure payment as required by statute of all persons supplying labor and material in the execution of the work provided for in the contract. Benefits Of Bonds: Provide capable qualified contractors Bonding Company will only issue bonds to contractors who have minimum risk involved with them. As an impartial third party, the surety prequalifies the contractor to verify that the contractor is capable and qualified. Assure project completion If contractor fail to do the work in timely manner or per specification then Owner is given assurance from the surety to finish the job on time and given amount. . A capable contractor is less likely to default on a project. However, there are many things that can cause contractors default, and in that event, the surety bond offers protections against financial loss. Offer financial security -Owner is assured that the project will be completed to their satisfaction and the original contract amount. Technical, managerial, or financial assistance -If the contractor requests help, the surety may offer technical, managerial, or financial assistance. This can help the project move forward and significantly reduce the likelihood of default. Reduce risk of liens filed by subcontractors, laborers, suppliers -Surety bonds relieve the private project owners from risk of liens filed by unpaid subcontractors and suppliers. In the absence of liens, the transition from construction to permanent financing is much smoother. Protect taxpayer dollars for public projects Smoother transition from construction to permanent financing Lower costs-When subcontractors and suppliers know they are protected by a payment bond, they may present lower quotes since they no longer have to absorb the risk of nonpayment. How Do Surety Companies Evaluate the Contractor? Before issuing a surety bond to the contractor, the Surety Company will look for the following items: Good References and reputation Financial strength of the Company. Credit history. Bank relationship Credit and debit. Experience related to contract requirements- It includes education and field experience to prospective projects Ability to obtain equipment to perform the work Ability to hire necessary employees to perform the work Work in progress. -Projects that are in-hand and are currently in progress. Management capability. How the contractor will be able to manage their company and its projects. Geographic area in which the company operates. Financial Data consideration: Surety Company will look at financial reports of the company to determine whether they will be providing surety bonds to the contractor or not. They will review: CPAs Opinion Quality of financial statements Type of accounting method used to recognize revenues earned CPAs Opinion: Influences the amount of credibility underwriters assign to the reported data (financial statements). Usually pronounces the entire examination and statement to have been prepared and presented in agreement with GAAP. (preferred by surety underwriters) Quality of Financial Statement: Compilation- Accountant provides no assurance regarding the numbers presented in clients financial statement. No detailed examination of the figures in the statement Review- Accountant provides a more than routine examination of numbers. Assurance exists that there are no misrepresentations Audit- Accountant applies industry accepted auditing procedures including verification of relevant items in the statements. Accountant certifies that financial statement is presented in accordance with GAAP. * Only when a statement is prepared under the audit does a surety consider the evaluation of the contractors financial structure complete Type of Accounting Method : The Accounting method used by the contractor is significant to underwriters because it indicates how the accountant has recognized the contractors income. Types: Cash Basis-income taken into account when received Straight Accrual-income taken into account when earned Percentage of Completion-income recognized as work progresses Completed Contract-income reported in the year contract was completed Underwriters prefer not to see cash basis or straight accrual statements. Percentage of Completion method gives the most accurate picture of financial position because income is recognized in proportion to cost incurred. Recommended by American Institute of Certified Public Accountants Financial Analysis: Surety underwriters review issues related to the contractors financial statement and perform data analysis. For example, if a particular contractor has failed to make a profit in recent years, they will have a rather difficult time in preserving a relationship with a surety company. Surety evaluates: Capital base Sufficient working capital Profitability Asset utilization Overhead expenses Notes accompanying the financial statement Ratio and trend analysis Qualifications of the CPA preparing the statement Suretys also strongly consider backlog that the company has and also the contractors costs related to completing any current projects. What this reveals to the surety company is whether the contractor has the ability to cover overhead expenses for the planned project for which they wish to bid. This is one of the leading issues of the surety and the project owner. Ratio Analysis: Sureties use ratios to analyze the companys finances Focus analysis in five areas: Liquidity-Current Assets/Current Liabilities Operations-Effectiveness of management Leverage-Level of debt pressure Coverage-Ability to service debt Specific expense items-Relate expense items to net sales Ratios are compared to the contractors historical values and against industry averages. Profit and Growth Analysis: To analyze company profitability, sureties review the schedule of current and completed projects Sureties also closely scrutinize the profit trends of the company and managements commitment to corporate growth Banking Credit: A strong banking relationship is a part of a solid financial history for a contractor. Surety companies want to see contractors with a strong banking relationship, but mainly with sufficient working capital to support work programs without bank borrowing. Conclusion: In addition to the above mentioned items which are evaluated by the surety company before issuing a bond, sureties also check the contractors credit rating by gathering information from such sources as Dun and Bradstreet and Robert Morris Associates reports, suppliers, other contractors, and the contractors bank. From the above sources, the surety is able to gain access to information such as: present/ average bank balances, credit established with the contractors bank, total experience in the industry, length of business relationships with various parties. Even after all the information is provided to the surety, there is no guarantee it will result in approval. The bond will be approved only if the surety is confident the contractor is qualified to perform the contract successfully and has the financial capacity to withstand the numerous risks involved in the construction business.
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