(a) This could lead to a loss of confidence in the company’s financial health and prospects. Disgruntled shareholders may decide to withdraw their shares, potentially leading to liquidation.

In addition, Dividends are an essential factor that attracts potential shareholders and investors to a company. When FD plc decides not to pay dividends, it might be perceived as a sign of financial instability or a lack of profitability. This could deter potential investors from investing their money in the company and, instead, opt for other investment opportunities that offer better returns, including companies that do pay dividends regularly.

Both risks could have adverse effects on FD plc’s overall financial standing, reputation, and ability to raise capital in the future. Dividends are a way for companies to reward shareholders for their investment and demonstrate financial strength. Not paying dividends could signal uncertainty and negatively impact investor perceptions of the company’s performance and prospects.

(b) To achieve maintaining solvency and support the resumption of dividends, the two financial options FD plc could consider is:

raise regulatory capital by issuing new long-term debts. These debts may come in the form if bonds or other financial instruments with fixed repayment terms and interest rates. By selling these debts to investors, the insurance company receives cash inflow, which contributes to its regulatory capital requirements.

Another way to raise regulatory capital is by issuing new shares in the market. This process involves offering additional ownership shares in the company to shareholders. By selling these new shares, FD plc receives additional equity capital regulatory requirements.

The second financial option FD plc could consider is reduce regulatory capital requirements by increasing reinsurance arrangements to transfer some risk exposure to reinsurer. Reinsurance effectively acts as an external source of capital. By transferring risks to reinsurers, FD plc can free up capital that was held as a reserve for those risks, thus improving its regulatory capital adequacy. Moreover, reduce the volume of business written particularly in lines which require high capital requirement. Some lines of business might have higher inherent risks, leading to a greater capital requirement to cover potential losses. By scaling back on these lines, FD plc reduces its exposure to higher-risk scenarios, thus enhancing its risk profile and overall financial stability.

Finally, switching out of higher risk-assets such as equities which are subject to market volatility and carry a higher level of risk due their sensitivity to economic market and relocating into lower-risk ones such as government bonds because it often provides fixed interest payments at regular intervals, offering stable income steam. (CII study text, M92 Insurance business and finance, 2023-24)

Question 9 – Across more than one Learning Outcome (30 marks)

(a) The first challenge that DD plc is facing their overhead expenses are high. Overheads include both fixed expenses, like employee salaries and leases, and variable expenses like maintenance and utility bills. they need to reduce their overhead expenses to increase their profits. cutting overhead costs is one of the fastest ways to reduce expenditure.

The second challenge is that finance costs are high, and they need to pay their full loans as soon as possible. financing costs are defined as the interest and other costs incurred by the Company while borrowing funds. They are also known as “Finance Costs” or “borrowing costs. finance costs, however, refers to the interest costs and other fees given to debt financers. Highly leveraged companies may find it difficult to pay off the debt on time and structure their debt or convert debt into equity for the creditors.

Third challenge is that trade receivable is high, which can lead to issues in cash flow. Keeping track of trade receivables can help a business improve its liquidity and preserve cash flow.

the fourth challenge is that DD plc current ratio is less than 1.00, it means that they don’t have the capital on hand to meet its short-term obligations if they were all due at once. The current ratio indicates a company’s ability to meet its short-term obligations. Those obligations are typically paid for using current assets.

(b) to solve the overheads cost challenge, DD plc should consider outsourcing, not only premises that cost money; there’s also the cost of full-time wages and benefits. Outsourcing certain tasks like tax preparation, accounting, and marketing offer distinct benefits if employing a full-time employee doesn’t make sense for your business. Not only do you save by not paying a full-time salary or wages, but you also cut recruitment costs. Outsourcing is particularly valuable if you require narrow expertise for a fixed period.

To address the issue of high overhead costs, DD plc could explore outsourcing. Beyond physical premises expenses, there’s the significant outlay for full-time salaries and benefits. Outsourcing specific functions such as tax preparation, accounting, and marketing provides notable advantages when employing a full-time worker isn’t practical. This approach not only saves on full-time compensation but also reduces recruitment expenses. Outsourcing proves especially advantageous when specialized expertise is needed for a limited duration.

to reduce the trade receivables, DD plc have to to send invoices immediately, by sending invoices immediately after fulfilling your obligation to the client, you can avoid a delay in payment. Try to send your invoices within 48 hours at the most.

To mitigate the trade receivables challenge, DD plc should prioritize sending invoices promptly. By issuing invoices immediately after fulfilling obligations for clients, delays in payment can be circumvented. Aim to send invoices within a maximum of 48 hours to expedite the payment process.

To enhance the current ratio, DD plc should take several measures. Firstly, they should exercise strict control over overhead expenses through outsourcing, which can effectively reduce costs. Additionally, they can consider selling some of their non-current assets to bolster liquidity. Moreover, DD plc should analyse where they allocate their time and resources. For instance, after implementing remote work arrangements, transitioning to digital processes can lead to cost savings by minimizing paper usage and related expenses. Exploring technological solutions and streamlined workflows can contribute to increased efficiency and financial stability.

To address their outstanding loans, DD plc should explore refinancing options to secure better interest rates. Refinancing holds the potential to decrease monthly payments and overall interest expenses for DD plc. Additionally, it’s advisable for DD plc to engage in negotiations with their lenders, discussing their circumstances and potentially seeking lower interest rates or revised payment schedules.