Briefly explain tagna, Financial Management

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TAGNA

(a) Market effectiveness is commonly discussed in terms of pricing efficiency. A stock market is expressed as efficient when share prices fully and fairly reflect relevant information.

Weak form efficiency take place when share prices fully and fairly reflect all past information such as share price movements in preceding periods. If a stock market is pathetic form efficient investors can't make abnormal gains by studying and acting upon past information. Semi-strong form efficiency take place when share prices fully and fairly reflect not only past information but every publicly available information as well such as the information provided by the published financial statements of companies or by reports in the financial press. If a stock market is semi-strong type efficient investors can't make abnormal gains by studying and acting upon publicly available information.

Strong form efficiency take place when share prices fully and fairly reflect not only all past and publicly available information but all relevant private information as well such as confidential minutes of board meetings. If a stock market is strong form efficient investors can't make abnormal gains by acting upon any information whether publicly available or not.

There is no empirical proof supporting the proposition that stock markets are strong form efficient and so the bank is incorrect in suggesting that in six months the stock market will be strong form efficient. But there is a great deal of evidence suggesting that stock markets are semi-strong form efficient and thus Tagna's shares are unlikely to be under-priced.

(b) A substantial interest rate raise may have several consequences for Tagna in the areas indicated.

(i) As a manufacturer as well as supplier of luxury goods it is likely that Tagna will experience a sharp decrease in sales as a result of the increase in interest rates. One cause for this is that sales of luxury goods will be more sensitive to changes in disposable income than sales of basic necessities and disposable income is likely to fall as a result of the interest rate increase.

Another reason is the probable effect of the interest rate increase on consumer demand. If the raise in demand has been supported even in part by the increase in consumer credit the substantial interest rate increase will have a negative effect on demand as the cost of consumer credit increases. It is as well likely that many chain store customers will buy Tagna's goods by using credit.

(ii) Tagna may perhaps experience an increase in operating costs as a result of the substantial interest rate increase although this is likely to be a smaller effect and one that occurs more slowly than a decrease in sales. As the high cost of borrowing moves through the various supply chains in the economy producer prices may increase and material and other input costs for Tagna may increase by more than the current rate of inflation. Labour costs may as well increase sharply if the recent sharp rise in inflation leads to high inflationary expectations being built into wage demands.

Acting next to this will be the deflationary effect on consumer demand of the interest rate increase. If the Central Bank has made a precise assessment of the economic situation when determining the interest rate increase both the growth in consumer demand and the rate of inflation may fall to more acceptable levels leading to a lower increase in operating costs.

(iii) The earnings profit after tax of Tagna is probable to fall as a result of the interest rate increase. In addition to the diminish in sales and the possible increase in operating costs discussed above Tagna will experience an increase in interest costs arising from its overdraft. The combination of these effects is probable to result in a sharp fall in earnings. The stage of reported profits has been low in recent years and therefore Tagna may be faced with insufficient profits to maintain its dividend or even a reported loss.

(c) The purposes of public sector organisations are often difficult to define. Although the cost of resources used can be measured the benefits gained from the consumption of those resources can be difficult if not impossible to quantify. For the reason that of this difficulty public sector organisations often have financial targets imposed on them such as a target rate of return on capital employed. Additionally they will tend to focus on maximising the return on resources consumed by producing the best possible combination of services for the lowest possible cost. This is the denotation of value for money often referred to as the pursuit of economy efficiency and effectiveness.

Economy refers to looking for the lowest level of input costs for a given level of output. Efficiency refers to looking for the highest level of output for a given level of input resources. Effectiveness refers to the level to which output produced meets the specified objectives for example in terms of provision of a required range of services.

In contrast private sector organisations should compete for funds in the capital markets and must offer an adequate return to investors. The purpose of maximisation of shareholder wealth equates to the vision that the primary financial objective of companies is to reward their owners. If this objective isn't followed the directors may be replaced or a company may find it difficult to obtain funds in the market since investors will prefer companies that increase their wealth. But shareholder wealth cannot be maximised if companies do not seek both economy and efficiency in their business operations.


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