Strategic management decision making

This report is about the issues with the view to give strategic guidelines for sound finance and strategic management decision making in two companies which are BAE systems and Raytheon systems. The report focuses on five issues to see how these companies use the methods to make company decisions. Examples will be shown on the use of these methods where appropriate. According to Dyson. J. R (2001) that capital investment may be considered to be part of the capital budgeting process. It involves both the selection of long term investments and financing of them.

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There are five main techniques that accountants can use in capital investment appraisal. The payback method is an attempt to estimate how long it would take before a project begins to pay for itself. For example, Raytheon spends 486 (million) for the expenditures for property, plant and equipment. The calculation need to be done on how many years it would take before 486 (million) had been received back in cash. Net cash flow will be used to measure the recovery in the project investment. Net cash flow is the difference between cash received and cash paid during a defined period of time.

For example, net cash used in investing activities from continuing operations is 47 (million). The net increase (decrease) in cash available on demand for Raytheon is 641 million (2000) and decrease to 343 million (2001). The cash and cash equivalents at beginning of the year in 2000 was 230 million while 2001 was 871 million carried forward from last year’s figure from cash and cash equivalents at end of year 2000. While the BAE systems is 115 million (2000) and increase to 653 million (2001).

More financing, less liquid resources and decrease in net cash outflow before financing and management of liquid resources had increases the net increase in cash available for demand. 2) Discounted Payback The discounted payback method could be used in Raytheon systems and BAE systems where it focuses on cash recovery of an investment and it allows for cash received now that may be worth more than cash receivable in future. A project is acceptable if the discounted net cash flow throughout its life exceeds the cost of the original investment.

Raytheon anticipates 2002 pension income to decrease to approximately $85 million. Subject to market conditions and the impact changes in actuarial assumptions including the discount rate and expected return on plan assets. Then, profits will be divided by capital employed where it could be either the initial capital employed in the project or the average capital employed over its life. ARR and the return on capital employed (ROCE) ratio take the same approach to performance measurement.

Profit can be seen as a net increase in wealth over a period and relating to the size of investment to achieve it seems a logical approach. ROCE is widely used to measure business performance. Shareholders use this ratio to evaluate management performance and the financial objective of a business will be expressed in terms of a target ROCE. According to BAE systems financial statement that, in prior years, long term recourse provisions had been established on a discounted net present value basis, and accordingly an adjustment was made in the year and charged to interest to maintain the net present value of these provisions.

Prior to 2000 year end Annual Report that part of the adjustment relating to provisions established as exceptional items had been treated as an exceptional charge within interest. As part of the 2000 year end reporting process the directors reconsidered this presentation in light of the more common treatment of such adjustments to discounted provisions and accordingly this charge was included within the normal interest payable for the group in 2000 year end Annual report. Ordinary share capital represents the risk capital of a company.

There is no fixed rate of dividend and ordinary shareholders will receive dividend only if profits available for distribution still remain after other investors (either shareholders or lenders) have revised interest or dividend payments. If BAE systems or Raytheon is wound up, the ordinary shareholders will proceeds from asset disposals only after lenders and creditors, often preference shareholders have received entitlement. The total loss from discontinued operations was $1, 143 million pre-tax, $752 million after tax or $2. 08 per diluted share in 2001.

In 2000, the company recorded a loss on disposal of discontinued operations of $415 million pretax, $287 million after tax which included a gain on curtailment of the RE;C pensions plans of $35 million and a loss from discontinued operations of $98 million pre tax and $70 million after-tax, totalling $513 million pretax, $357 million after tax or $1. 05 diluted share. Because of the high risks associated with this form of investment, ordinary shareholders will normally require a comparatively high rate of return from the company.

Approximately $20 million of the offering costs were allocated to equity and $6 million were allocated to the mandatorily redeemable equity securities. The net proceeds of the offering were used to reduce debt and for general corporate purposes. Each equity security unit consists of a contract to purchase shares of Raytheon’s common stock on May 15, 2004 which will result in cash proceeds to the company of $863 million and a mandatorily redeemable equity security with a stated liquidation amount of $50 due on May 15, 2006 which will acquire a cash payment by the company of $865 million.

The mandatorily redeemable equity security represents an undivided interest in the assets of RC Trust I, a Delaware business Trust formed for the purpose of issuing these securities and whose assets consist solely of subordinate notes issued by the company. The cash paid for the quarterly distribution on the mandatorily redeemable equity security was $31 million in 2001.