Aims

The aim of this assignment is for students to demonstrate an understanding of the ways in which finance is managed within a business organisation.

Summary of Outcomes

1. Explore the sources of finance available to a business
2. Analyse the implications of finance as a resource within a business
3. Make financial decisions based on financial information
4. Analyse and evaluate the financial performance of a business

Questions

Task 1

A plc is an investment organisation which is considering 2 potential new investments. These are mutually exclusive options in that the acceptance of any one investment would prevent investment in the other.

The organisation uses an after-tax weighted average cost of capital (WACC) of 14%.

Details of the two investments are as follows:

Investment A has an immediate cash outflow of £33,000 and this would be followed by cash inflows of £20,000 at the end of year 1, £20,000 at the end of year 2, £11,000 at the end of year 3 and £11,000 at the end of year 4.

Investment B requires an immediate cash outflow of £30,000 and would be followed by cash inflows of £12,000 at the end of year 1, £10,000 at the end of year 2, £20,000 at the end of year 3 and £20,000 at the end of year 4.

Assume, for purposes of this case, that the annual cash inflows equate to taxable profits before capital allowances.

For both investments, the initial outflows attract a first year taxation capital allowance of 35% based on the initial investment amount, followed by writing down allowances of 35% of the tax written down value for years 2 and 3. Each investment will be disposed of at the end of year 4 with a nil residual value. The capital allowance to be claimed in year 4 for both investments will therefore be a balancing allowance which will reduce the taxation written down value to zero.

A plc pays corporation tax at the rate of 25% of its taxable profits after allowing for capital allowances. Assume that taxation in respect of year one profits is paid at the end of year two.

Required

(a) Calculate the net present values, payback period ,accounting rate of return and IRR of each of the proposed investments and recommend with justifications which of the two investments, if any, should be selected.

(b) The management of A plc considers to use bank loan, equity, debt or leasing to finance the investment selected in (a) above.

(i) Please identify sources of funds available to A plc,

(ii)and assess the cost of each sources of fund.

(iii) and assess the implication of each sources of fund.

(c)and make proposals for obtaining funds if A plc is (a) a highly geared organisation and (b) a low geared organization,

(d) also assess the impact of the finance on financial statement.

Task 2

The following information has been extracted from the accounts of R Ltd., a mobile phone retailer in Hong Kong.

Required

Analyse financial statements using relevant techniques, such as ratios, to assess the profitability, liquidity, efficiency and gearing of R Ltd by comparing internally and externally

                                                                                 Industry Norm

ROCE                                                                           15%

Profit Margin                                                                 30%

Net profit margin                                                           10%

Liquid ratio                                                                   2:1

Quick ratio                                                                    1:1

Debtor collection period                                              45 days

Inventory turnover period                                            60 days

Creditor payment period                                             60days

Interest cover                                                           10 times

Dividend cover                                                          20 times

Gearing                                                                      60%       

Task 3

(a) "The management has knowledge ,power to acquire the kinds of information needed for investment decision"

Please identify each internal decision makers in an investment decision of a business and describe their respective information needs.

(b) The objective of financial statements is to provide information of an enterprise that is useful to wide range of users in making economic decision.

Please explain the purpose of the main financial statements.

(c) The financial statements of sole trader, partnership and limited company have different presentation style. Please describe the difference between the FORMATS of financial statement of these different types of business.

Task 4

(a) Budget is most useful when done as an integral point of an organisation's strategic analysis. Strategic analysis underlines financial planning and the results of which is in budgets. And the budget provides feedback about the effect on the strategic plans. Then why financial planning is important?.

(b) On 1 December 2007, Tire-Lire, SNC, is attempting to project cash receipts and disbursements to 31 January 2008.On this latter date, a note will be payable in the amount of $100,000. This amount was borrowed in September to carry the company through the seasonal peak in November and December.

The trial balance on 1 December shows in part the following information

Sales terms call for a 2% discount if payment is made within the first 10 days of the month after sales, with the balance due by the end of the month after sales. Experience has shown that 70% of the billing will be collected within the discount period.20% by the end of the month after sales, 8% in the following month and 2% will be uncollectible. There are no cash sales.

The average selling price of the company's product is $100 per unit. Actual and projected sales are

All purchases are payable within 15 days. Thus approximately 50% of the purchases in a month are due and payable in the next month. The average unit purchase cost is $70. Targeted closing stocks are $500 units plus 25% of the next month's unit sales.

Total budgeted marketing, distribution and customer service costs for the year are $400,000. Of this amount, $150,000 for the year is considered fixed and is incurred evenly through the year. (and included depreciation of $30,000). The remainder varies with sales. Both fixed and variable marketing, distribution and customer services are paid as occurred.

(a) Prepare a cash budget for December and January. Supply supporting schedules.

(b) Please advise how to deal with the liquidity if the balance is in positive or negative amount.

Task 5

(a) The English Tea Company (ETC) operates a plant with a monthly capacity of 1 million case (each case consisting of 200 cans) of iced tea. Current production and sales are 600,000 cases per month. The selling price is $90 per case. Costs of R&D and product and process design at ETC are negligible. Customer-service costs are small and are included in marketing costs. All variable costs are vary with respect to output units (cases), and production is equal to sales. The variable cost per case and the fixed cost per case (based on a production quality of 600,000 cases per month) are as follows:

Variable manufacturing overhead of $6 per case is the cost of heating, cooling and lighting. Detailed of the fixed manufacturing overhead costs and their case utilized costs (based on a production quantity of 600,000 cases per month) are as follows:

Greek Tea (GT) is constructing a new plant to make iced tea in Athens. The plant will not open for four months. GT's management, however, wants to start selling 250,000 cases of iced tea each month for the next 4 months in Greece. GT has asked ETC and two other companies to bid on this special order. From a manufacturing cost viewpoint, the iced tea to be made for GT is identical to that currently made by ETC.

If ETC makes the extra 250,000 cases, the existing total fixed manufacturing overhead ($7,800,000 per month) would continue to be incurred. In addition ETC would incur a further $300,000 in fixed manufacturing overhead costs (materials procurement costs of $100,000 and process-changeover costs of $200,000) each month. No additional costs will bw required for R&D, design, marketing, distribution or customer service. The 250,000 cases will be marketed by GT in Greece, where ETC does not sell its iced tea.

A senior manager of GT notifies each potential bidder that a bid of $45 per case will probably be non-competitive. ETC knows that one of its competitors, with a highly efficient plant, has sizable idle capacity and will definitely bid for the contract.

Please write a brief report to explain what price should ETC bid for the 250,000 case contracts?

(b) Peter Brightwell is well-known motivational speaker. The Tavistock Speaker's Bureau wants Brightwell to be the sole speaker at an all-day seminar. Brightwell's agent offers Tavistock the choice of three possible fee arrangements.

(i) Schedule 1 : $8000 fee
(ii) Schedule 2: $20per person + $2000 fixed fee
(iii) $50 per person

Each attendee will be charged a $200 fee for the all day seminar.

For each schedule, calculate the total cost and unit cost per seminar attendee if (1) 50 attend, (2) 200 attend and (3) 500 attend. Comment on the results.