Professional Service Management  

1.0 Introduction

KFC (Kentucky Fried Chicken) is a multinational company which is leading fast food restaurant over the world. It was launched in United States in the19360s and at present, it has grown their industry more than 8o countries. Currently, one of the largest business fast food industry in global market. However, in Malaysia, it was launched in 1973 by Jalan Tunku Abdul Rahman. Today, there are more than 500 KFC Restaurants nationwide and still counting. Great tasting chicken has become synonymous with KFC and has been enjoyed by Malaysians ever since (Solutions, L.2015). KFC already has taken own place in Malaysia by giving good quality of service.

Generally, service quality is a method which help in a farm to ensure the full satisfaction of customer. The SERVQUAL model has been created in a fairly high number of variants connected in arranged commercial enterprises. It was intended to assess customer’s perception of service quality with the intent to look at the level of execution of a successful and reliable business. Apart from seeing the level of service quality, it also assists firms to take some other advantages such as tracking customer expectations and perceptions over time (Weitz, and Wensley, 2006). The purpose of this model is used in showing of a service quality of the company in terms of find out the gap between customer satisfaction and perception. However, the SEVQUAL model was designed by Zeithaml, Parasuraman and Berry (1980) in order to manage the business to ensure the full satisfaction of customer. The gap creates between vendor and customers when perceive level of quality difference. Because, the vendor think they are providing high level of service quality but the customer think oppositely. 

2.0 Dimension of service quality in KFC

KFC Service quality analysis also plays important role as the part of specialized quality management in KFC. There are five main dimension of service quality in KFC’ Malaysia’s such responsiveness, assurances, tangibles, empathy and reliability are as follows:

2.1 Responsiveness

The responsiveness refers how quickly service provider respond to customer’s order and how instantly the service provider are ready to give service to customer. The responsiveness of customer service is additionally considered as the key and noticeable point to succeed the incremental growth of service quality in KFC. As realized that KFC World and KFC Malaysia customers service officers are prepared to be responsive by the demand and order from the prospective customer. The KFC Malaysia applies the procedure of responsive and bind quick service to serve their respective customer. In addition, we have comprehended that just about KFC's outlets in Malaysia, understood that almost KFC’s outlets in Malaysia.

2.2 Assurance

The assurance is also considered as important determinants which customer take into the account. Assurance means how familiar the customer service to take care of the customer needs as well as their problems. KFC Malaysia assure that the quality of service is the best in the courtesy, ethics and politeness of their service personnel and officers. The KFC managers also must assure that the customer will not wait for the longer time to get the order what they want in KFC.

2.3 Tangibility

It is the most important service quality which the service provider of KFC must prominent which need to be consider through the cleanness outlets, the neatness officers and service personnel and also the officers also can service the order what the customer wants.

2.4 Empathy

It is the capacity to recognize feeling of the customer in order to make well communication and understand the customers. The KFC of Malaysia, the ordering person can communicate with the customers but they are not aware of feeling of customer. Lack of understanding always make mistake with customers.

2.5 Reliability

It means that the service provider must perform the service with dependably. Reliability is the probability that an item won't fail within particular time period. The reliable includes the capacity of KFC's machine to be dependable into certain period and food service are well done by right individuals. KFC will give preparing to each franchisor and do occasional checking the status of machines in order to best quality service. KFC Malaysia assure that the quality of service is the best in the courtesy, ethics and politeness of their service personnel and officers.

3.0 Gaps Analysis of KFC in Malaysia

Serviced gap is defied between what the customer are expecting and what is being delivered by service provider. In KFC of Malaysia has found five gaps which they need to give more focus on that gaps in order to develop customer satisfaction. The five gaps are as follows:

Source: Serviceperformance.com, 2015.

3.1 Gap1: Expected service between customer and Market Company

The first gap happens between expected service between customer and Market Company.  A restaurant must be ready to welcome many kids of customers with hope to satisfy them all (Kumaran, Maran and Anbazhagan, 2011). The KFC never welcome to their customers even they do not response the customer, have also limited variety. KFC should look at their customer because business is in competitive market. The capital of Service Company is customer. In this case, KFC may start keeping a new people or waiter who will let customer welcome and will pass to the customer’s menu of KFC, when they enter in KFC. To minimize this gap, they may make variety in the KFC to attract customer. Because, KFC can make customer satisfaction by making variety inside the KFC.

3.2 Gap 2: Expected service between management perception and customer expectation

The second gap arise when expected service between management perception and customer expectation. Some companies experience difficulties in translating the consumer expectation into specific service quality delivery. This can consist of poor service design, failure to maintain the quality and frequently update their provision of good customer service or it can say a lack of standardization. As we know the KFC not only in Malaysia but also all over the world. It’s a multinational company, the employees of KFC can explain their customer expected to management. So that they can work on it. However, every customer wants to get the high quality product with low price. In KFC of Malaysia, the price of the product is high and the service is not good as the price. It has also limited delivery area which they are not able to fill up the customer expectation due to located in city area.

3.3 Gap 3: Service quality specification and actual service deliver

The third gap arise when the service quality specification and actual service deliver. It is referred as the service performance gap which service providers do not perform at the level expected by the management. The gap creates when the instruction of service delivery do not promise high quality service delivery or performance. It measures the performance gap between service specifications and service delivery. The size of this gap depends upon employees’ willingness and ability to perform at the appropriate level. This gap revelations the weakness in employee performance. Organizations with a Delivery Gap may specify the service required to support consumers but have subsequently failed to train their employees, put good processes and guidelines in action. As a result, employees are hard prepared to manage consumer’s needs.

As we know, when the customer comes to KFC, they need to take food by themselves and the customers wait for a long time to get services. However, there is no specific direction where they can get service from KFC. They may write self-service to let customer recognise. So, the customer can able to get where they need to go for the service. For example, there is place in KFC where the customer takes the service by themselves such straw, tomato- couch, KFC need to mention by writing self-service in there which will help customer to get actual service.

3.4 Gap 4: Service Delivery and External Communication

The fourth gap is when promises made do not match actual delivery inadequate horizontal communication between departments or services a propensity to over promise (Suresh, P 2013). In some cases, promises which are made by the companies through advertising media and communication raise customer expectations. When over-promising in advertising does not match the actual service delivery, it creates a communication gap. Consumers are disappointed because the promised service does not match the expected service and as a result they may seek alternative products. As expectations are playing a vital major role in consumer perceptions of service quality, the firm must be certain not to promise more in communications that it can deliver in reality. Promising more than can be delivered will raise initial expectations that lower perceptions of quality when the promises are not fulfilled by the company.

The KFC, this gap arises when the services are not provided as promised. That is, for example, in their advertisement they are mentioning that the Family is RM 15.80 but the actual price for that that food is more than RM15.80 after including VAT and the other taxes which depends on the country’s policies. Therefore, the price which KFC is promised in their advertisement to their customers are not providing to them which may lead to the formation of this Gap.

3.5 Gap 5: Expected service and perceived service

The fifth gap arise when between expected service and perceived service. It occurs when the differences between what has really delivered to the customers and what customers feel they have received. However, customer expectations are influenced by the extent of personal needs, past service experiences and word of mouth recommendation. The difference occurs when customers are influenced and service provider has shortfall. The KFC is one of the largest fast food restaurants in the world which is available in 80 countries. The above Perceptions Gap do not found in KFC Malaysia as they always maintain their standard of branches, dine-in, home delivery, cleanliness of restaurant, environment, etc. so every time when customers go there or order anything from there or even after years of time they will receive the same taste or even better than before. The customers never regret their decision even they went to another country and tried KFC over there. They found same standard and quality everywhere so this gap is not available in KFC.

4. Conclusion

I have chosen KFC which actually found four gaps by using SERVQUEL model. KFC Malaysia should fill up the gap in order to get customer satisfaction. I also have discussed here five dimension of KFC which will help for KFC to give good quality in service to customers. KFC Malaysia would be more customer satisfaction if they solve the gap.  KFC Malaysia may expand their services in rural area and in that case they put less price of services.

5.0 References:

Sahu, K. (2012). KFC Service Gap. [online] Slideshare.net. Available at:             http://www.slideshare.net/Keshaw_Kumar_sahu/kfc-service-gap [Accessed 9 Sep. 2015].

            Serviceperformance.com, (2015). [online] Available at: http://serviceperformance.com/wp-            content/uploads/ServQual.gif [Accessed 10 Sep. 2015].

Solutions, L. (2015). KFC Malaysia | KFC Malaysia. [online] Kfc.com.my. Available at:     http://www.kfc.com.my/kfc-malaysia/ [Accessed 9 Sep. 2015].

Stuff, (2015). Service key for KFC chief. [online] Available at:             http://www.stuff.co.nz/business/industries/9564777/Service-is-key-for-new-KFC-chief             [Accessed 11 Sep. 2015].

Suresh, P (2013). GAP ANALYSIS & SERVQUAL. [online] Available at:             http://www.slideshare.net/praveensureshpai/gap-analysis-servqual [Accessed 11 Sep. 2015].

Zeithaml,V. A., Berry, L. L. and Parasuraman, A. (1996).The Behavioral Consequences of Service Quality.             Journal of Marketing [online] Available at:             http://connection.ebscohost.com/c/articles/9604100835/behavioral-consequences-service-   quality [Accessed 11 Sep. 2015].

Zekiri, J. (2011). Applying SERVQUAL Model and Factor Analysis in Assessing Customer Satisfaction       with Service Quality: The Case of Mobile Telecommunications in Macedonia. [online] Available         at: http://www.scribd.com/doc/65904212/Applying-SERVQUAL-Model-and-Factor-Analysis-       in-Assessing-Customer-Satisfaction-with-Service-Quality-The-Case-of-Mobile-        Telecommunications-in-Macedoni#scribd [Accessed 11 Sep. 2015].

Managing finance 

1.0 Introduction of Agency Relationship

            Agency relationship is an arrangement where one entity hires another entity to work on behalf of it. Agency relationship involves between two parties, one is principal and another is agent. This relationship arises when one or more individuals (known as principal) appoints another individual (known as agent) to complete some service and delegate the decision making authority to that agent. In addition, agency relationship is a fiduciary relationship that means it based on the trust and confidence where the principal delegates the authority and funds to the agent. It is also known as principal –agent relationship. However, in a large corporation, there is separation of management and ownership. It means those who are the owners don’t participate to manage the firms and those who manage the firms are not the owners. As we know, shareholders are the owners of the large corporations. Therefore, shareholders employ the managers to work on behalf of them where shareholders are the principal and mangers are the agent. Usually shareholders employ professionals who have technical skills, knowledge and experience so that the can work to protect the best interest of the shareholders. But mangers might take actions which are not in the best interest of shareholders For example, Nasser works on behalf of Rami. Nasser contracts with Raza to purchases 500 football. Unfortunately, Raza are not able to pay 200 football bill after delivering the product. Rami can legally responsible for Raza’s bill although the business was made by Nasser. So, here Nasser legally not responsible for this since Nasser works as agent of Rami.

2.0 Agency problem

            In the relationship of management and shareholder, there is a possibility of conflicts to interest between the principle and the agent called agency problem which actually occurs in finance. An agency problems occurs when the shareholder gives to manager (agent) to look after the company, the manager may look to their own needs first. However, if in a company employs want to earn more profit by using false accounting report, the owners will loss. Enron is a well-known organization, in 2001 this organization was lost a large amount of dollars due to personal needs of employs. On Dec. 2, 2001, Enron declared bankruptcy. Thousands of people were thrown out of work, and thousands of investors - including most of the company's employees - lost billions of dollars as Enron's shares shrank to penny-stock levels (Edmonds, P. 2015).   As from example of Enron, in 2001, the collapse of energy giant Enron indicated how catastrophic the agency problem can be when the company’s officers and governing body, including Chairman Kenneth Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were offering their Enron stock at higher price because of accounting reports that made the stock appear to be more significant than it really was. After the embarrassment was revealed, a considerable number shareholders lost a large amount of dollars as Enron share value plummeted.

Another agency problem occur when financial analysts invest to best interest of their customer. A structured financial product that pools together cash flow-generating assets and repackages this asset pool into discrete tranches that can be sold to investors. A collateralized debt obligation (CDO) is so-called because the pooled assets – such as mortgages, bonds and loans – are essentially debt obligations that serve as collateral for the CDO (Staff, I. 2003). Thereof, Goldman Sachs is better example of regarding this problem. Goldman Sachs and other stock brokerage firms established mortgage-backed securities, the mortgages would suffer foreclosures. As from example of Goldman Sachs and the real estate bubble made short-term sellers. At the point when the housing bubble hit in 2008, the estimations of the CDO's dropped and the short-sellers made a huge number of dollars. In the meantime, a huge number of investors and property holders lost nearly everything in the collapse.

3.0 Agency costs

            Agency costs are internal costs incurred from asymmetric information or conflicts of interest between principals and agents in an organization (Wilkinson, J.2013). It refers the owner of the company want manager to run the company in order to increase share value of shareholder, the manager may look at own benefit even though market value of the company is low which stated agency cost. However, in a large corporation, two types of agency costs forms are direct agency cost and indirect agency cost. The direct agency cost refers the suboptimal decision are made by managers in order to grow own benefit of managers either market value high or low of the company. In a corporation, have three direct agency costs are monitoring costs and bonding costs and corporate expenditure. For example, the manager try to avoid those project have high risk and there is possibility of outcome is negative.

3.1 Direct costs

3.1.1 Monitoring costs

            It is another agency costs which costs are allowed by shareholder to monitor or restriction action of manager. As Jensen and Meckling (1976) states that “Monitoring costs are expenditures paid by the principal to measure, observe and control an agent’s behavior. They may include the cost of audits, writing executive compensation contracts and ultimately the cost of firing managers” the cost of the monitoring will be paid by the owner although the compensation occur by agent.  For example, if a board of director at a company acts behave of shareholder to monitor the management activities in order to increase the shareholder value. The costs of having consider as monitoring costs. However, monitoring will able to prevent more obvious agency cost like Parks. It can confirm that managers are putting adequate time for the occupation. Be that as it may, monitoring for controlling to diminish the monitoring costs by managers needs time and money. In spite of the fact that a percentage of the monitoring are beneficial, yet some of them is soon come as far as possible when an additional dollar spent of monitoring would not give back an additional dollar worth from reduced agency cost .

3.1.2 Bounding costs

            This will be issued to ensure that manager’s activity will not hurt shareholders wealth and to guarantee that the principal will be compensated in case of manager harmful by such activities. Bonding cost is borne by the agent which is included misdemeanor, contractual obligation on the power, limitation on profitable opportunities to take full advantage. In most of the agency relationship the agent will bring about positive monitoring and bonding costs, i.e., financial and in addition non-monetary, and edition. However, there will be some difference decision between the principle and the agent that the decision would expand the welfare of principle. For example, if a manager agree to stay with a company in order to run the company behave of shareholder. The managers have to forgo other potential opportunities are considered as bonding costs. Denis (2001) argues that optimal bonding contact must look at best interest of shareholder in order to take all decision by managers. Moreover, since managers cannot made to do everything that shareholder would wish to do. But bonding gives a method for making managers do a portion of the things that shareholders would like by composing a not as much as perfect contract.

3.1.3 Corporate expenditure

            It refers the costs is shareholder but management takes benefit. This cost bone by shareholder. In a corporation, management works behave of shareholder to manage the company in terms of increase the share value of company. Corporate expenditure raises those costs which is more expensive and is not important to buy for the company. Assume, the company purchases new luxuries jet which is not needed for the company but the management will take this advantages.   

3.2 Indirect costs

3.2.1 Loss of opportunity

            It refers despite the investment is favorable for company, the managers not agree to take this investment for their self-interest. As we know business means risk. If the company doesn’t take a risk to invest, the company will not able to run their business and the share value of the company will not increase. However, if a company wish to invest new share. The new investment is expecting to favorable impact for the share value, besides that also have some risky for the firm. The owners of the company wish to take this investment in order to rise the share value. The manager may not wish to take this decision because there is a possibility of negative outcome. The managers will not make this investment due to loss their job if the outcome is negative. In this case, the company may lose a valuable opportunity.

4.0 Remedies to reduce the agency problem

            Conflict of interest is one of the major problem in public listed companies due to separation of their management and ownership. Generally it arises when there is a difference between shareholders and management goals. The difference of the goals may affect the performance of the company. Therefore, it is obligatory for the companies to resolve this conflict. However, the remedies of conflict of interest are discussed below-

4.1 Managerial Compensation

            Managerial compensation is one of the way of reducing the conflict of interest between the management and shareholders. If the company provide enough remuneration and facilities to the managers it can reduce the conflict of interest. However, compensation can be in the form of shares instead of remuneration which may be the effective way of resolving conflict of interest.

1)      Executive Share Option Scheme: This is a performance based scheme by which managers can buy the shares of the company in the future date where the prices are determined now. This scheme inspire the mangers to work in such way that will push up the price of shares at future time. When the mangers works to rise the share price, it increase the company performance that may result a high profit for the company which is main goal of the shareholders. But this scheme may not be beneficial for the company.

2)      Performance shares: A kind of shares given to the managers that are connected with the company performance and the performance of the company depends on the earning per shares, return on capital, return on equity. When the EPS, ROE increase the price of the performance shares increase. These kind of shares motivate the managers to work on behalf of the company in order increase their share price.

Furthermore the conflict of interest can be reduced by taking two extreme position regarding the top managers of the company.

1)      Threat of dismissal: Companies can threat to the top managers that if the company make a bad performance they will be cut off. But this process is not very effective for large companies where the ownership and the management are highly dispersed.

2)      Exposure to take-over Bid: When the performance of the company is bad, and the share is consequently undervalued it may be exposed to hostile takeover bid.  Which may affect the top manager’s jobs. The tendency of hostile takeover bid motivates by other companies motivates the managers to take their actions in such way which can maximizes the share price.

4.2 Corporate governance

            Companies can reduce the conflict of interest by establishing good corporate governance within the organization. According to Dayton (1948) corporate governance as the process, structures and relationships through which board of directors oversee what the executive do to achieve the objective of the company. The main objective to have a good corporate governance to ensure that all the activities of the organization are in line with the interest of shareholders. A corporate governance do the following in order to resolve the conflict of interest.

1)      It establish a culture in which Directors will give priority to protect the shareholders best interest.

2)      It analyzes corporate audit regulations, corporate disclosure framework to improve the accountability and transparency of companies, compliance to statutory regulation, best ethical practice, and consumer protection and so on.

3)      It ensures that the audit committee assists the board of directors to make the financial statements accurate and transparent ensuring compliance with the legal and regulatory requirements, and the efficiency of the company’s internal audit functions.

4)      It ensures the creditability of companies, and the existence of managerial system which promotes creative entrepreneurship.

5)      It increase corporate value by ensuring transparency and efficiency.

6)      It allows the board of directors to observe management activities by implementing policies.

7)      It ensure the reward of those who provide finance to the Companies.

Company account 
Table of Contents

         

Q.1.	A)	Memorandum and Articles of Association	2
	B)	Share redemption process	5
	C)	Relationship between Authorized share capital and issued share capital	7
	D)	Define of subsidiary company	7
	E)	Goodwill on consideration	8
Q2.			9
	A)	Selected method calculation and justification	9
	B)	Calculation of value of shares price	9
	C)	Criticize and consideration on the method selected	10
		References	11

Introduction

The report discusses the function of Memorandum and Articles of Associations is an important for a public limited company and how the company can redeem the share also discusses. The reports discuss the relationship between the authorized share capital and issued share capital. After that the reports define a subsidiary company as company act 1965. It also discuss the types of goodwill on consolidation. The net assets value per share calculation, justification and consideration have been presented in the question number 2.

Question 1.

 A) Memorandum and Articles of Association

Both are the important document for a Limited Company. On the one hand, the Memorandum of Association is the document of set up the company and on the other hand, the Articles of Association is the document that set out how the company should be run, governed and owned. Generally, those documents are allotted during the incorporation step of the company.

Memorandum of Association

The memorandum is a standard-format document that outlines the names of the first members of a company and declares their intention to form and become part of that company. (Tapley, C. 2014). It is a single –stage format that the original member of a limited company must subscribe their name to be part of the company. The legal document of the company will not be changed according to company formation and subscriber’s names also not be changed or put off after establishment. It occurs to keep the whole document of the company whether any original member of the company leave or new member join to the company. According to Lord Macmillan, “The purpose of the memorandum is to enable the shareholder, creditors and those who deal with the company to know what is permitted range of enterprise.” Memorandum indicates the explanation of the scope activates of the company in order to let shareholders know investment areas for the company and also can able to know about their risk by investing money. The memorandum actually external affairs. In this case, the outsider can easily understand about limitation of the working of the company in order to deal with prescribed scope. Memorandum defines the limitations on the powers of the company established under the Act. Below the image is the sample of the memorandum of association.

Source:  publishyourarticles.net/wp-content/uploads/2015/06/holomove-memorandum-lg.jpg

The Memorandum consists five compulsory clauses are the name clause, the registered office clause, the object clause, the liability clause, and the capital clause.

 Firstly, the name is important for the company due to recognize its company from other any company. The company can select any name except king, queen, emperor, government, WHO, NOU or World Bank. Giving the name of the company must use ‘Sdn Bhd’ for private limited company and ‘Berhad’ for public limited company end of the name. In order to that shareholder can easily understand where they are going to invest exact company.

Secondly, every company must have registry office to communicate to registrar companies to have corresponsive with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier (Kumar, A. 2010). If the company wants to shift their office one place to another place in the same state, the company will be required to take special renovation to approve which involves in alteration in the memorandum.

Thirdly, the object clause is more important of memorandum of association. It decides the rights and forces of the organization furthermore characterizes its circle of exercises.  A company will not able to take up the activity, if not mention in the objective clause. However, this clause is difficult to alter later on, thus, it should be decided sensibly. It offers security to the shareholder by giving security that the funds upturn of the undertaking will be safety in any other undertaking. The object clause can be changed to enable a company to carry on its activities more economically, or by improved means to carry on some business which under existing circumstances may conveniently by combined with the object clause (Kumar, A. 2010).

Fourthly, the liability clauses indicates the liability of the members are limited which the value of the shares held by them. It means that the share will be liable to pay which share is still not paid of their shares. The liability of shares are limited by guarantee for their members which every member can undertake to contribute to the assets of the company in the occasion of its weeding up.

Fifthly, the capital clause indicates the total capital of the proposed company where the division mention equity share capital and preference share capital. The amount of shares will be given in every category of shares. There have some exceptional cases such as rights and privileges that would be displayed on any kind of shareholders to enable the public to know what are the exact nature of capital structure of the company.

Articles of Association

Article of association is the major document which contains the internal rules, regulations, duties, responsibilities of the company. It provides a guidelines to the members of the company in order to conduct activities .Actually it defines how the company is run, owned and governed. The articles can put restrictions on the director’s authority that the director will not pursue certain course of action without the shareholder approval. The Articles of Association provide for the different voting and dividend rights attached to different share classes, as well as restrictions on the transfer of shares. These further include a preliminary clause with word definitions provided so as to prevent ambiguity during interpretation. This document also defines the company and provides for its members; it provides guidelines for the resignation and termination of directors by the Board; it also includes rules on holding annual and extraordinary general meetings, with regard to quorum, notices of meetings, proceedings and voting. It also indicates the maximum and minimum number of directors the company must have and how they may be disqualified. it provides the inclusion of alternative executives, the powers and duties of executives and their interests and proceedings at Board meetings. The Articles of Association also include provisions for the CEO and Company Secretary, and details clauses relating to the company seal, auditing and accounting, winding up and indemnity. Below the image is a sample of article of association (One, J.2009).

source: Agreements.org, 2015

B) Share redemption process

Redemption of share means returning the money of the share capital to the shareholders at a fixed date or after a certain period of time. Generally, redemption happens for the fixed security for example, preferred share, bond etc. Redemption of preferred share means pack back the preferred share capital to the preferred shareholders. It indicates an outflow of cash and it is necessary for the company to ensure that the sufficient money is in their account before redemption to run their business. When the redemption take places the assets reduce in the amount and liabilities of the company reduce by an equal amount. In addition, redemption of preferred shares can be either at par value or premium. When the redemption take place at par value or nominal value, then the nominal value of the shares will be equal to the amount payable to preferred shareholders. But if the redemption take places at premium the amount payable to the shareholders will be greater than the nominal value. However, there three strategies or ways used by the company to redeemed the shares are given below-

(1) Redemption by a fresh issue of share: A company can issue new shares (ordinary or preference) to redeem the existing redeemable preference shares, the new shares can be issued at par, premium or discount. It must be noted that the amount of the new share value will be equal of the redeemed share capital in terms of not suffer from the lack of capital. The company may prefer to implement this form of redemption whether the company has not sufficient liquid fund. There will not be an excessive outflow of funds and it may also new share at premium. As example, the directors resolved to redeem all the redeemable preference share at a premium of 10% and to make a new issue of 4000000 ordinary shares of $1 each at par for the purposes of redeeming the preference share. All the new shares were fully paid up. The solution will be 4000000 new ordinary shares at par are issued to replace the 4000000 11% redeemable preference share capital redeemed. The premium on redemption of $1500000 is provides for by writing it off against the retained earnings.

(2) Redemption out of profit: This is the redemption process of preferred share where the company use it profit or any reserve instead of issuing new shares. If the company has sufficient amount of profit or reserve, it can return the share capital of the preferred shareholders by placing the profit in the form of capital. This process has the effect of “freezing” past profit and covering it to become part of the paid up capital. Sometimes, company creates capital redemption reserve from the profit in order to redeem the preferred share capital because the capital structured needs to be maintained in its original form. This reserve is non distributable reserve not used to cover the loss. For Example, company wants to redeem preferred share capital amount $30000, to recover this amount, company place $ 30000 from capital redemption reserve in order to maintain its capital in the original form.

(3) Redemption from fresh issue of shares and out of profit: At times, company uses both two process together to redeem the preferred share capital. In this process, the nominal amount of new shares and the amount of profit transferred from the capital redemption reserve will be equal to the nominal amount of share redeemed. For example, company ABC wants to redeem the share capital amount $100000. It can cover its redeemed capital by issuing new shares $5000 at $10 each will be $50000 and another $50000 from its capital redemption reserve.

C) Relationship between Authorized share capital and issued share capital

The authorized share indicates the maximum amount of the share capital that a company is allowed to issue by the memorandum of association where issued share capital represents that part of the nominal value of shares which are offered to the public for subscribes and thus would be shareholder. The amount of the authorized share capital can remain unused which will not affect to the authorized share capital whereas issued share capital can be either fully paid or partly paid. Assume, the issued share capital paid partly, each shareholder will be liable for the money owed on any shares due to the company hold the share. Furthermore, issued share capital can never exceed to the total authorized share capital that will be a positive relation between them. For example, the authorized share capital of a company ABC is $100000 and the number of shares$ 10000 each $10 where the company ABC issues 8000 shares to the public at $10 for each then the issued share capital is $80000

D) Define of subsidiary company

A subsidiary company is one which actually is controlled by a holding company. A company whose voting stock more than 50% controlled by another company is known as subsidiary company. According to section 5 of the company’s act 1965 defines as a subsidiary company as follows:

a) In which the investor company

(i) Controls the composition of the board of directors of the investee company or

(ii) Controls more than half of the voting power of the investee company or

(iii) Holds more than half of the issued share capital of the investee company (excluding any part thereof which consists of preference shares); or

b) It is a subsidiary of a subsidiary of the investor company. Below the diagram shows it clearly

                                            

The diagram shows that the holding company holds more than 50% of the equity shares of S1, S2, S3, S4, and S5.  It also shows clearly that the holding S1, S2, S3, S4, and S5 form a group where H is being the holding company and other companies being subsidiaries under the holding company. The diagram clearly presented the subsidiary company is a part of the holding company which is controlled by the holding company. For instance, the holding company wishes to share their equity to subsidiary company any amount of share i.e.; 35% shares would belongs to subsidiary company under the holding company.

E) Goodwill on consideration

Goodwill on consolidation represents the excess of the cost of the acquisition over the fair value of the net assets of the subsidiary at the date of acquisition. It is considered as the premium paid to acquire the shares. This goodwill arises only in the consolidated account. However, there are three ways of dealings with goodwill on consolidation.

1) Retain goodwill at cost less impairment: Goodwill is considered as a non-depreciable assets and will appear in the consolidated balance sheet as an intangible non-current assets as cost less impairment. By retaining goodwill at cost it is assumed that it has an indefinite life. FRS 3 requires goodwill to be tested for impairment annually or more frequently if there are indicates that it might be impaired.

2) Amortize goodwill over a number of years: Goodwill is capitalized and its cost is written off (amortized) against profits over a number of years. The difficulty is the determination of the useful life.   This method was previously allowed but it is not permitted under FRS 3. While goodwill is no more amortized to cost in uniform additions, goodwill is to be measured every year to figure out whether there is an impairment loss.

3) Written off goodwill immediately against reserves: Goodwill is written off against the group’s profits in the year of acquisition of the subsidiary. This is the most conservative method as it assumed that there is no relationship between the goodwill and further performance of the subsidiary. Generally. Goodwill not be shown the assets in the balance sheet. The goodwill can be influenced with asset and can be referenced as an expense brought about in the expectation of future income. It would appear  to make more sense if acquired goodwill were viewed as an advantage for which thought  was paid which does not lose its worth after some time despite the fact that this is not worthy under current account practices.

Question 2

A) Selected method justification

The net value of assets of the company are divided by the number of shares to reach at the value of each share. The net asset value of share valuation is the best method for the company in order to calculate net asset value that will help to determine the value per share for a company. It refers to the value of a single unit, or share, or a fund which specify the price of buying and selling.  The main reason of choosing the net assets value to compare the company value with its market value by using market book ratio or price book ratio. The investor can believe the company when the net asset values is more than market value. The above explanation will help to take a decision of Cabbort Ltd to purchase Ramlift Co.

B) Calculation of value share

Total assets                                                                                   (-)Current liabilities               Net assets	=$1130000 =($330000)
	=$8000000

 Calculation of Share price

Net assets / No. outstanding of shares	=$8000000 / $415000	=$1.93

C)  Criticize and consideration on selected method

According to this method, there are number factors need be considered while valuing sharers are as follows:

ü  The fixed assets must receive to realizable value

ü  Provision for bad debts, depreciation must be considered.

ü  If any assets and liabilities not recorded will be considered.

ü  Floating assets should be taken at market value

ü Goodwill must be properly valued

ü The fictitious assets such as preliminary expenses, discount on issue of shares and debentures, accumulated losses should be eliminated.

ü The external liabilities such as sundry creditors, bills payable, loan, debentures should be deducted from the value of assets for the determination of net value.

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