ACCOUNTING & FINANCE

Accounting & Finance

Accounting & finance Accounting and Finance

Introduction

The report attempts to focus on the concept of debt management as it applies in the concept of accounting and finance for companies. In this report, I present the financial management and accounting issues faced by the company, which in this case is Dracula Limited, in light of its expansion through a long term bank loan.

Case Overview and Issues

 Dracula Limited is engaged in theatrical costumes and fancy dress business since 1986. Its chief products include bat and vampire costumes. The company is located in Doncaster where it has its own manufacturing facility, and employs a large number of town's residents. Its products are sold in theaters as well as fancy shops. Also, some of the goods are exported mainly to Louisinia, United States. The company's stake is owned by seven directors, four of whom equally hold 80 percent of shares, while the rest own 20%. Its principal competitor is Goth Limited, a company in Southeast England.

Case Problem

Due to economic recession that spurred in 2007 and continues to date, Dracula Limited did not financially perform well and suffered minor losses in the most recent accounting periods. Mr. Lugosi, the managing director of the company, was able to sanction a long-term loan of £4 million in order to expand the business and make for the decreasing export figures. Since Lugosi expected that business is going to get better with the popularity of television series like Twilight and True Blood, he expects that the influx of cash from loan will result in improving the net assets to the tune of 200%, or twice the level at which it is now. The bank will charge an interest of 5% of the loaned amount per year, with the repayment due in ten years' time. In order to secure the loan, the company pledged its Doncaster factory premises as security. The company intends to invest this amount in additional machinery, working capital and new hires.

Long term loans reduce a company's net worth (Van Horne & Wachowicz, 2008). The problem in the case relates with the impact of obtaining a long-term loan in improving or worsening company's business as well as its financial position shown in the balance sheet. Already, the three directors of the company are concerned about Mr.Lugosi's decision. The company's practice of presenting its audited financial reports to the website, as well as the ...