Assume you are an external consultant.
SPP plc is a specialist plastics moulding company which supplies parts and accessories to several manufacturing companies in the automotive industry. Its shares are currently quoted at 658 pence per share and the majority of its customers are public sector organisations in the UK. SPP plc has experienced strong growth over recent years and has built strong relationships with their customers due to the company's focus on quality and on-time delivery.
In order to remain competitive the company is looking to expand its operations and purchase new machines, including state-of-the-art 3D printers. The new machinery will cost £9,000,000 and has a useful economic life of 3 years. Due to the rapid developments in printing technology the equipment is not due to have any residual value at the end of its life.
The forecast financial statements are given in the appendix at the end of this document.
You have obtained the following forecast information regarding 2018 and 2019:
1. SPP plc expects revenue to increase by 7% per annum in each of the financial years ending 31 December 2018 and 2019. Costs and expenses, excluding depreciation, are expected to increase by an average of 5% per annum.
2. Finance costs are expected to remain unchanged.
3. The ratio of trade receivables to revenue will remain the same for the next two years.
4. The ratio of trade payables to costs and expenses will remain the same for the next two years.
5. The value of inventories is likely to remain at 2017 levels.
6. The non-current assets are not depreciated in SPP plc's accounting records as they are land and buildings, and there are no capital allowances available on these assets. All other assets are either rented or leased on operating leases and therefore are not depreciated.
7. Dividends will be increased by 5% each year.
8. The corporation tax rate is 30%, with amounts payable or refundable one year's in arrears. Capital allowances (tax allowable depreciation) are available at 25% reducing balance on this expenditure.
SPP plc has three financial objectives as follows:
- to earn a pre-tax return on the closing book value equity of 35% per annum
- increase earnings per share each year
- achieve a current ratio of at least 1.40:1
The Chief Executive of SPP plc has indicated her desire to expand the scope of the company's objectives and would like suggestion on how non-financial objectives could help improve the financial performance of the company.
The Chief Executive has also indicated the need to discuss the expansion with the company's main shareholders over the forthcoming week. Although the shareholders are interested in the return the generated by the project specifically, they are more concerned with looking at the overall performance of the company and as such DO NOT REQUIRE a net present value analysis of the project.
Required:
The Finance Director has asked you, as an external consultant, to prepare a report for presentation to the board of directors which will include the following:
(i) forecast income statements, dividends and retained earnings for the two year ending 31 December 2018 and 2019.
(ii) forecast statements of financial position as at 31 December 2018 and 2019.
(iii) a discussion of three possible options available to finance any cash deficits that arise during the two years ending 31 December 2018 and 2019. You should include a suitable recommendation on the financing options.
(iv) a summary of whether the company is likely to achieve its financial objectives for the two years ending 31 December 2018 and 2019.
(v) an evaluation of the suitability of setting the current financial objectives, irrespective of whether or not these are forecast to be achieved in 2018 and 2019.
(vi) three non-financial objectives that could be incorporated by SPP plc, and a justification as to the usefulness of each.
Attachment:- Appendix.rar