Managerial Finance
Henryuzo33
ACC7032ManagerialFinance-2020-21S2Coursework18-12-2020UDJM.docx
BIRMINGHAM CITY BUSINESS SCHOOL
POSTGRADUATE DEGREES
COURSEWORK FRONT SHEET
MODULE TITLE: Managerial Finance
MODULE CODE: ACC7032
LECTURER: Amerdeep Jakhu (ML)
ISSUE DATE: 25th January 2021
HAND IN DATE: 5th May 2021 at 12.00pm (midday)
HAND BACK DATE: 8th June 2021
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Learning outcomes and pass attainment level:
· Evaluate the different competing financial objectives of the firm and the agency problem between shareholders and managers in publicly listed companies. · Demonstrate the ability to analyse financial data, conduct cost-benefit analysis and financial planning for effective business decisions using spreadsheet software package. · Critically evaluate investment projects using appropriate investment appraisal techniques to assess suitability and viability of the projects consistent with the overall strategy and business model(s) of the firm. · Critically appraise the major issues of capital management, relative advantages and disadvantages from the various perspectives of the stakeholders of the firm. |
General guidance
The assessment for this unit is one coursework assignment. The required mark has been set at 50%. If you are attempting a first or second re-sit attempt your pass mark will be capped at 50%.
This is an individual assessment. Whilst there is no objection to you discussing the content of this assignment with your peers, your final submission must be completely your own work. Plagiarism and copying will not be tolerated and may lead to subsequent penalties being imposed. This is an individual assignment and all calculations, analysis and narrative submitted must be your own work.
The assignment will require a considerable personal investment of time and effort.
Structure of the assignment
There are three separate questions included within the assignment and you should attempt all three questions. There is no word limit to questions. If any part of the assignment is ignored this reduces the maximum marks which could potentially be awarded. The assignment answer should be carefully checked before submission for the use of appropriate and acceptable grammar. The correct use of English spelling is to be employed throughout.
All the numbers should be reported in 2 decimal points.
Submission of the assignment
All three questions must be attempted and submitted in one document. You are advised to prepare your assignment in Word format and copy and paste contents from Excel where spreadsheets have been used to support your work. Only Microsoft Word file will be allowed for submission.
Your student ID number should be shown on each page of your assignment.
Your assignment should be submitted electronically via Moodle and you are advised to do this well in advance of the submission deadline to avoid any system related issues. Feedback on your assignment will also be provided via Moodle once the marking has been completed.
Marking of the assignment
The matrix on the following page has been provided to assist you in completing your assignment and is an indicative guide only, not a formal marking scheme.
Page 2 of 10
Indicative marking guide
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Fail (0%-49%) |
Pass (50%-59%) |
Commendation (60%-69%) |
Distinction (70%-100%) |
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Question 1: LO1 (40%) |
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A lack of breadth and depth of financial analysis techniques accompanied by incorrect formulae or calculation without appropriate explanation. Poor layout or presentation in anything other than business report style. Inadequate grammar and lacking in overall knowledgeable synthesis. |
Evidence of some financial analysis techniques but with errors of formulae and calculation with insufficient explanation and adequate presentation. Attempt at a business report format with some supportive appendices. Mainly descriptive with some attempt at synthesis. Grammar and structure being adequate. |
Wide range of financial analysis techniques evident and supported by full disclosure of formulae and accurate calculation in a clear format. Presented in business report format and coherently structured. Supported by referenced appendices. Effective and well-reasoned narrative discussion. |
An excellent range of financial analysis techniques which are supported by full disclosure of formulae and accurate calculation in a clear format. Excellent business report format and well structured. Supported by fully referenced appendices. Excellent analytical and justified explanations showing synthesis and application. |
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Question 2 and 3 LO2, LO3 and LO4 (60%) |
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A lack of understanding of management accounting and decision making. Unable to produce the correct format and calculations. Limited or no narrative discussion or recommendations and conclusions. Poor academic writing and referencing.
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Ability to apply some management accounting decision making techniques. Demonstrates an adequate understanding of the principles and techniques involved. Reasonable attempt at analysis and discussion of findings, though of limited depth. |
A good application of management accounting for decision making. Demonstrates a good understanding of the principles and techniques involved. Good analysis and discussion of findings, with good use of academic references which support clear and well explained conclusions. |
Excellent application and understanding of management accounting for decision making. Thorough and detailed critical discussion with excellent use of a range of academic references which support clear, practical, and well explained recommendations and conclusions. |
Question 1
The scenario
Unity Holdings Plc has a portfolio of investments in subsidiary companies and is seeking another acquisition that complements the others.
The subsidiary companies already in the group include: machinery and commercial vehicle dealership; finance company; equipment leasing company; haulage company with a fleet of 150 heavy goods vehicles (HGV), and a chain of value hotels across the UK, one of which is making a loss.
Two possible acquisition targets have been identified:
VANTAGE Ltd is based in leased converted hotels and provides care services for young people unable to be cared for in the foster system. Unity Holdings Plc are looking into the possibility of converting their failing hotel into a provider of care services and VANTAGE is looking for another property to continue expanding around the UK;
DUNHOP Ltd has a large yard and caters for the storage and repair of up to 50 commercial vehicles at one time, and has the potential for more space as it is based in a large empty industrial area. DUNHOP is looking for a contract with a fleet operator to stabilise their income and growth.
Extracts from the financial statements of both target companies are shown below:
The ratio analysis below is in 4 categories (Profitability, Management Efficiency, Liquidity and Gearing), and needs completing:
Requirements
1.1 Prepare a business report, maximum 2 pages lon g (approximately 400 words) with an appendix for your ratio analysis.
It is to be addressed to the board of directors of Unity Holdings Plc.
You must evaluate the financial statements, interpret the ratio analysis and make a convincing argument for investment in one of the two target companies.
Your report should be supported with academic references throughout, and your ratio analysis should be put in an appendix to the report.
(400 words, 30 marks)
1.2 Critically evaluate the working capital management (WCM) of both companies using academic references and draw conclusions on which is stronger. (200 words, 5 marks)
1.3 Create a table that lists the advantages and disadvantages of all the finance options available to Unity Holdings Plc. Explain, with references, the source of finance you recommend as most suitable way to finance the investment in either VANTAGE Ltd or DUNHOP Ltd.
(200 words, 5 marks)
Question 1 total 800 words, 40 marks
Marking guide
Carefully examine the marking guide below to ensure that you structure your answer to include every element:
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Mark allocation |
RATIO CALCs |
INTERPRETATION |
OTHER |
TOTAL |
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Q1.1 |
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Profitability |
4 |
3 |
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7 |
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Management efficiency |
4 |
3 |
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7 |
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Liquidity |
2 |
3 |
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5 |
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Gearing |
2 |
3 |
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5 |
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Conclusion & recommendation |
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2 |
2 |
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Credible academic citations |
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2 |
2 |
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Layout, structure and grammar |
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2 |
2 |
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Q1.2 Working Capital Management |
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5 |
5 |
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Q1.3 Sources of finance |
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5 |
5 |
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Total |
12 |
12 |
16 |
40 |
Question 2
The company manufactures three products code named: Alpha, Beta and Gamma. The maximum market demand and resource requirements of each of these products are shown below:
The company's products are unique, exclusively made from a recently patented advanced material that can only be sourced from one supplier.
The purchasing manager has informed you that the maximum supply of this special material is limited to 65,000kg. There is no stock held in reserve because it immediately uses all of the material exclusively supplied by the patent holder.
Without sanction from the board, the sales director has accepted an order for 50,000 Gamma that, if not fulfilled, would incur a financial penalty of £25,000. This order is included in the maximum market demand figure.
The directors need to know whether they should go ahead and satisfy the contract and then prioritise production in the normal way or whether it should consider breaching the contract and incurring the penalty.
Question 2
Required:
2.1. Prepare a marginal cost card showing selling price, variable costs, and contribution per unit for each product. (3 marks)
2.2. Calculate the break-even point (BEP) for each product (3 marks)
2.2.1. Using your calculations of the Break Even Point (BEP) for each product create a CVP chart that shows the BEP graphically. (3 marks)
2.2.2. Using your calculations and graphs of the BEP for each product comment on the Director's concern about the level of demand and operational gearing levels for each product. (2 marks)
2.2.3. The fixed overheads are apportioned based on the floor space used by each relevant product team, do you have any suggestions that will reduce operational gearing and improve profitability? (2 marks)
2.2.4. Why is it important to tightly control overheads and work to keep operational gearing as low as possible? (3 marks)
2.3. Calculate the contribution per kg of scarce resource and give a ranking to each product (the first has the highest contribution per kg). (3 marks)
2.4. Prepare a budgeted production schedule and a marginal cost income statement (analysed by product) for 2021 assuming that the Gamma contract is honoured. (5 marks)
2.5. Prepare budgeted production schedule and a marginal cost income statement (analysed by product) for 2021 assuming that the Gamma contract is not honoured.
(5 marks)
2.6. Advise the company, with brief justification, whether to honour the Gamma contract or not based on your analysis. (1 mark)
Question 2 total 600 words/equivalent, 30 marks
Question 3
As a Unity Holdings Plc junior manager, you have been asked for your annotated calculations and recommendation regarding a decision whether to lease or buy new premises.
The option to buy
The costs of buying include £1,950,000 for the freehold land, building costs of £2,612,500, and £268,100 for fittings and equipment. At the end of the fifth year the property is expected to be worth £4m.
The option to lease
The building to be leased requires refurbishment that will cost £500,000 and fixtures and fittings will cost £283,000. The terms of the 5 year lease are £50,000 per month.
Comply with company policies
Any decision should be based on the results of calculating Net Present Value (NPV) of 5 years of cash flows using a cost of capital of 10%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a significant cushion in case of increases in inflation or interest rates that the directors are concerned are unpredictable.
The cash flows
Both options will use the same cash flows. Year 1 sales revenue is expected to be £7,150,000; the cost of core products are £2,370,000; ancillary stock purchases £1,250,860; staff costs £1,138,020; light & heat £368,720; other overheads £604,240. The cash flows for years 2 to 5 are the same, but are expected to increase by 2% inflation each year.
Requirements for Question 3
Using the information above and in accord with the above stated company policy you are required to calculate the following for both options:
i. Net Present Value (NPV)
Property lease option 5 marks
Property purchase option 5 marks
ii. Payback period (PBP) and Discounted Payback Period (DPBP) 8 marks
iii. Internal Rate of Return 2 marks
iv. Based on your calculations for each of the above state which option you recommend? 5 marks
v. Critically discuss the limitations of the above project appraisal techniques. 5 marks
Question 3 total 600 words/equivalent, 30 marks
COURSEWORK TOTAL MARKS: 100
END
Statements of Profit or Loss (SoPL)£vertical analysis£vertical analysis
Turnover1,253,824
100%
1,257,518
100%
Cost of sales(744,606)
59.39%
(574,645)
45.70%
____________________
Gross profit
509,218
40.61%
682,873
54.30%
Administrative expenses(205,032)
16.35%
(322,603)
25.65%
Other operating income12,020
-0.96%
0
0.00%
____________________
Operating profit
316,206
25.22%
360,271
28.65%
1,204
0.10%
1,583
0.13%
Interest payable and similar charges(13,662)
1.09%
(25,321)
2.01%
____________________
Profit on ordinary activities before taxation
303,748
24.23%
336,533
26.76%
Tax on profit on ordinary activities(57,712)
4.60%
(63,941)
5.08%
____________________
Profit for the year
246,036
19.62%
272,592
21.68%
____________________
Other interest receivable and similar income
VANTAGE LtdDUNHOP Ltd
Statements of Financial Position (SoFP)
£
vertical
analysis
£
vertical
analysis
Non current assets
Leasehold Property improvements
195,200
32.6%
8,500
0.9%
Plant and machinery
25,000
4.2%
195,600
20.1%
Fittings and equipment
27,500
4.6%
3,400
0.3%
Motor vehicles64,00010.7%23,0002.4%
Total Non Current Assets
311,70052.0%230,50023.7%
Current assets
Inventory58,4399.7%292,19530.1%
Trade receivables93,81015.6%228,22023.5%
Cash at bank and in hand135,54222.6%221,33722.8%
Total Current Assets
287,79148.0%741,75276.3%
Total Assets
599,491100.0%972,252100.0%
Liabilities
Current liability: Trade payables155,41825.9%122,94412.6%
Non current liability: Bank borrowing198,00033.0%320,52533.0%
Total Liabilities
353,41859.0%443,46945.6%
Equity and reserves
Called up share capital20.0%20.0%
Profit and loss account246,07141.0%528,78154.4%
Total Equity
246,07341.0%528,78354.4%
Total Equity and Liabilities
599,491100.0%972,252100.0%
VANTAGE Ltd
DUNHOP Ltd
RatiosFormulae
VANTAGE
Ltd
DUNHOP
Ltd
Profitability Ratios
ROCE PBIT %71%
Capital Employed
Return on Assets PBIT %53%
Total Assets
Asset Turnover Revenue x2.1
Total Assets
Gross Profit Margin Gross profit %40.6%
Revenue
Net Profit Margin PBIT %25.2%
Revenue
Efficiency Ratios
Inventory Holding period (I) Inventory x 365days29
Cost of Sales
Receivables Collection period (R) Trade receivables x 365days27
Sales
Payables payment period (P) Trade payables x 365days76
Cost of sales
Cash Cycle
I + R - P
days-20
Liquidity Ratios
Current Ratio Current Assets x:11.9
Current liabilities
Acid test Ratio Current Assets - stock x:11.5
Current liabilities
Financial Risk or GEARING Ratios
Gearing Fixed int capital %44.6%
Total capital employed
Interest cover ratio PBIT x23.1
Interest charges
Budgeted data for 2021AlphaBetaGamma
Maximum demand50,00075,00080,000
Heat resistant material (grams per unit) 400250600
Actual results for 2020
AlphaBetaGammaTotal
Sales (units)60,00095,00075,000230,000
Sales revenue (£)1,199,400949,0501,124,2503,272,700
Raw materials (£)202,500222,750302,400727,650
Direct labour (£)81,00022,500273,000376,500
Fixed overheads (£)331,250496,875331,2501,159,375
Total Costs614,750742,125906,6502,263,525
Profit / (Loss) (£)584,650206,925217,6001,009,175
