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ACC7032  Managerial Finance

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MODULE TITLE:                   Managerial Finance

MODULE CODE:         ACC7032

LECTURER:                Amerdeep Jakhu

ISSUE DATE:              21stSeptember 2021

HAND IN DATE:          12thJanuary 2022 at 12.00pm (midday)

HAND BACK DATE:   9thFebruary 2022

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. 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.

Indicative marking guide

Fail (0%-49%)Pass (50%-59%)Commendation (60%-69%)Distinction (70%-100%)
Question 1: LO1 (40%)
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.
Question 2 and 3 LO2, LO3 and LO4 (60%)
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.  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

Mars 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 200 heavy goods vehicles (HGV), and a chain of value hotelsacross the UK, one of which is making a loss.

Two possible acquisition targets have been identified:

Wyre Child Ltd is based in leased converted hotels and provides care services for young people unable to be cared for in the foster system. Mars Holdings Plc are looking into the possibility of converting their failing hotel into a provider of care services and Wyre Child Ltd is looking for another property to continue expanding around the UK;

Border Commercials Ltd has a large unit and caters for the storage and repair of up to 60 commercial vehicles at one time, and has the potential for more space as it is based in a large empty industrial area. Border Commercials is looking for a contract with a fleet operator to stabilise their income and growth.

Extracts from the financial statementsof both target companies are shown below:

Statements of Profit or Loss (SoPL)
WYRE CHILD SERVICES LtdBORDER COMMERCIALS Ltd
 vertical analysis£vertical analysis
Turnover1,542,280100%1,258,950100%
    
Cost of sales(783,796)50.82%(375,852)29.85%
__________ __________ 
Gross profit758,48449.18%883,09870.15%
    
Administrative expenses(367,548)23.83%(419,765)33.34%
Other operating income9,0150.58%00.00%
__________ __________ 
Operating profit399,95125.93%463,33336.80%
    
Other interest receivable and similar income1,2040.08%1,5080.12%
Interest payable and similar charges00.00%(38,505)3.06%
__________ __________ 
Profit on ordinary activities before taxation401,15526.01%426,33633.86%
    
Tax on profit on ordinary activities(39,405)2.55%(63,223)5.02%
__________ __________ 
Profit for the year361,75023.46%363,11428.84%
__________ __________ 
Statements of Financial Position (SoFP)
WYRE CHILD SERVICES LtdBORDER COMMERCIALS Ltd
£vertical analysis£vertical analysis
Fixed assets    
Tangible assets4,6561.1%291,54630.9%
    
Total Non Current Assets4,6561.1% 291,54630.9%
Current assets    
Trade receivables78,17518.5%285,27530.3%
Cash at bank and in hand338,85580.4%366,16038.8%
    
Total Current Assets417,03098.9% 651,43569.1%
    
Total Assets421,686100.0% 942,981100.0%
    
Liabilities    
Current liability: Trade payables207,22449.1%122,94413.0%
Non current liability: Bank borrowing00.0%371,33539.4%
    
Total Liabilities207,22449.1% 494,27952.4%
    
Equity and reserves    
Called up share capital20.0%20.0%
Profit and loss account214,46050.9%448,70047.6%
    
Total Equity214,46250.9% 448,70247.6%
    
Total Equity and Liabilities421,686100.0% 942,981100.0%

The ratio analysis below is in 4 categories (Profitability, Management Efficiency, Liquidity and Gearing), and needs completing:

RatiosFormulae WYRE CHILD SERVICES LtdBORDER COMMERCIALS Ltd
Profitability Ratios   
ROCE        PBIT      %95% 
 Cap Employed   
  
Return on Assets      PBIT     %95% 
 Total Assets   
  
Asset Turnover    Revenue    x3.7 
 Total Assets   
  
Gross Profit Margin   Gross profit   %49.2% 
 Revenue   
  
Net Profit Margin    PBIT   %26% 
 Revenue   
Efficiency Ratios    
Receivables Collection period (R) Trade receivables      x 365days19 
            Sales   
  
Payables payment period (P) Trade payables         x 365days97 
    Cost of sales   
  
Cash CycleR – Pdays-78 
     
Liquidity Ratios    
Current Ratio Current Assetsx:12.0 
 Current liabilities   
Financial Risk or GEARING Ratios    
Gearing    Fixed int capital      %0.0% 
 Total capital employed   
  
Interest cover ratio          PBIT         x0.0 
  Interest charges   


Requirements

  1.  Prepare a business report, maximum 2 pages long (approximately 800 words) with an appendix for your ratio analysis.

It is to be addressed to the board of directors of Mars Holdings Plc.

Youmust evaluate the financial statements, interpret the ratio analysis and make a convincing argument for investment in one of the two target companies.

Your reportshould be supported with academic references throughout, and your ratio analysis should be put in an appendix to the report.

(800 words, 30 marks)

  1.  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. Create a table that lists the advantages and disadvantages of all the finance optionsavailable to Mars Holdings Plc. Explain, with references,the source of finance you recommend as most suitable way to financethe investment in either Wyre Chid services Ltd or Border Commercial Ltd.

                                                                                                                        (200 words, 5 marks)

Question 1 total                                                                                          1200 words, 40 marks

Marking guide

Carefully examine the marking guide below to ensure that you structure your answer to include every element:

Mark allocationRATIO CALCsINTERPRETATIONOTHERTOTAL
Q1.1    
 Profitability43 7
 Management efficiency43 7
 Liquidity23 5
 Gearing23 5
 Conclusion& recommendation  22
 Credible academic citations  22
 Layout, structure and grammar  22
Q1.2  Working Capital Management  55
Q1.3  Sources of finance  55
Total12121640


Question 2

Question 2

You work for a consulting firm that has been approached by a client who is concerned about the future of their business. The board of directors of AJ Supplies Ltd are considering halting the production of 2 of their products that appear to be making no profit.

As you can see from the table below the directors are considering closing products Bass and Clarinet in an effort to improve overall profitability.

You spot that management accounting would show the results differently and may affect the directors’ decision.

  AcousticBassClarinetTotal
 (£m)(£m)(£m)(£m)
Sales360240180780
  
Cost of sales 
 Materials(120)(80)(80)(280)
 Labour(120)(120)(120)(360)
 Overheads(60)(60)(60)(180)
Profit/(loss)60(20)(80)(40)

Requirements for Question 2 part (a)

  1. Use your knowledge of management accounting to calculate the contribution of each product                                                                                                                  5 marks
  1. Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Bass.                                                      1 mark
  1. Use your findings from part (a) and appropriate academic references to explain whether the company should stop making product Clarinet.                                     1 mark
  1. Discuss how and why marginal costing calculates contribution to pay overheads and why this is useful in evaluating product value to a firm?                                        1 mark
  • Do you agree that profitability will improve by ceasing to make Products Bass and Clarinet? What do you suggest the company does to increase profitability?                                                                                                                                                             2 marks

   Question 2 (a) total 10 marks

Question 2 (continued)

The board have approached you to get your opinion of their expansion plan, which includes a chain of factory outlet stores. Below are the figures for the first one that is planned for a central Birmingham location next year.

Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years cash flows using a cost of capital of 12%, Payback Period (PBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 5% cushion in case of increases in inflation or interest rates.

The investment consists of £4,000 for the land, building costs of £7,900, and £1,830 for fittings and equipment.

The cash flows in year 1 are expected to be: total sales revenue £28,600; the cost of Acoustic products sold £7,900; Bass stock sold £5,660; staff costs £1,180; light & heat £1,676; other overheads £6,424. The cash flows for the following years are the same, but are expected to increase by 2% inflation each year.

Requirements for Question 2 part (b)

Using the information above and in accord with the above stated company policy you are required to calculate:

  1. Net Present Value (NPV)                                                                               5 marks
  1. Payback period (PBP) and Discounted Payback Period (DPBP)                 5 marks
  1. Internal Rate of Return                                                                                   1 marks
  1. Based on your calculations do you recommend the investment is made and the new outlet store is built?                                                                                                             4 marks
  • Critically discuss the limitations of the above project appraisal techniques used and any other recommendations to the board.                                                          5 marks

   Question 2 (b) total 20 marks

   Question 2 Total 30 marks

Question 2 total                                                                  600 words/equivalent, 30 marks

Question 3

The budgeted statement of Comprehensive Income and Net Assets for GFX Industries are given below:

Budgeted Statement of Comprehensive Income

For the year ended 31st December 2021

 ££
Sales (25,000 boxes containing standard packets) 900,000
   
Direct Materials(350,000) 
Direct Labour(160,000) 
Variable Overhead(120,000) 
Fixed Overhead(140,000) 
  (777,000)
Profit 130,000

Budgeted Net Assets as at 31st December 2021

 ££
Non-Current Assets at net book value 375,000
   
Working Capital  
Receivables80,000 
Inventory110,000 
Payables(50,000) 
  140,000
Net Assets Employed 515,000

The current manufacturing facility is under-utilised and there is a proposal to extend sales to a supermarket chain with nationwide stores. However, the supermarket will sell the product under its own brand name.

Estimated effects of the proposal are;

Additional annual supermarket sales of 10,000 boxes at £30 per box.
Cost of direct materials would be reduced as a result of 8% quantity discount on all purchases and variable costs are expected to increase by 2%.
Extra supervisory and administrative staff will be required at a cost of £20,000 per annum
Market research has indicated that sales to existing retail outlets would fall by 10%. There will be no change in selling price to these customers.
Inventory and payables would increase by £40,000 and £25,000 respectively and the credit period extended to supermarket will be twice that allowed to existing customers.

Required:

Prepare the revised budgets to evaluate this proposal. Specifically you should:

 Prepare a revised budgeted statement of comprehensive income and a statement of net assets employed incorporating the results of the proposal i.e. Revised Sales Budget, Raw Material, Direct Labour, Variable Costs and workings.                                                                           16 Marks
 Calculate the effect on profit of the changes resulting from the proposal. Specifically calculate the Per Unit and Total Contribution for the old budget and the new budget.                                                                   6 Marks
 Advise management on the suitability of the proposal making any further calculations you consider necessary and adding any comments or reservations you think relevant.                                                  8 Marks

Total Question 3 (30 marks)

Question 3 total                                                                    600 words/equivalent, 30 marks

COURSEWORK TOTAL MARKS: 100

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