FIN7040 | Financial Decision Making Assessment | Finance
FIN7040 Financial Decision Making Assessment Finance
1. Case Study – EASY FLIGHT PLC Your role
You have just completed your MSc Management and joined Expert Consultancy as a trainee management consultant. You have been assigned to Easyflight plc and have been asked by your manager to produce a 3,500-word business report that will ultimately go forward to the board of directors.FIN7040 Financial Decision Making Assessment Finance.
Prepare a 3,500-word business report for your manager providing analysis and business advice following the requirements below.
Format: business report with headings, sub-headings and paragraphs 1 mark
Executive summary – key highlights/findings drawn from each task within the report 4 marks
Part 1: Business Performance Analysis
You will need to calculate and use appropriate ratios in your analysis for the sections required below:
1.1. Statement of Profit or Loss
Analyse and comment on the financial performance of Easyflight plc using all relevant information from exhibit 1. Your analysis should critically evaluate the lines of the Statement of Profit or Loss. You do not need to include a review of the segmental analysis in this section. 20 marks
1.2. Statement of Financial Position
Analyse and comment on the financial position of Easyflight plc using all relevant information from exhibit 1. Your analysis should critically evaluate the lines of the Statement of Financial Position. (20 marks)
1.3. Statement of Cash Flows
Use the Statement of Cash Flows (exhibit 1) and identify what has happened to the cash position of Easyflight during 2018.
Calculate and explain Easyflight plc’s Operating Cash Cycle (OCC) for 2018 and 2017.
Critically evaluate the company’s 2018 dividend policy and explain whether you think Easyflight was right to make this dividend payment in 2018 or not. (10 marks)
1.4. Market Segment Analysis
Use exhibit 2 to compare and contrast the financial performance of the different segments of Easyflight business in 2018 with the rest of the company. Then, to assist the board with their decision-making, recommend pricing and operating costs strategy for the different segments based on your findings. 10 marks
Part 2: Investment Appraisal (20 marks)
Critically evaluate the investment appraisal information (exhibit 3) supplied by the Financial Director.
Your evaluation should challenge the management forecast in the first part of your answer.
Then, in the context of Easyflight plc, critically evaluate the following investment appraisal techniques considering the benefits and limitations of each technique. You need to give a clear assessment as to whether the company was right to proceed based on the results of each appraisal technique.
Use the following sub-headings to structure your answer:
– Management Forecast
– Investment Appraisal Techniques
– Payback period
– Accounting Rate Of Return
– Net Present Value
2.2. Sources of Finance
Easyflight plc is considering a further investment, this time in an airport retail business of
£2,000m from 2019. Advise the Board of Directors on the benefits and drawbacks of two alternative sources of finance for this further investment, including an assessment of their appropriateness in this case. 10 marks
2.3. Non-Financial Factors
Advise the board of directors on other non-financial factors that they should consider regarding an expansion into airport retail. Your answer should be specific to Easyflight plc. (5 marks)
(Total 100 marks)
The word limit is 3,500 words excluding numerical tables, bibliography and appendices as per instructions. The executive summary is not included in the word count and should be approximately 175 words.
To assist you with this task you have been supplied with the following information:
• Exhibit 1: Extracts from Easyflight plc’s Financial Statements for 2018, including the Statement of Profit or Loss, Statement of Financial Position, Statement of Cash flows and Statement of Changes in Equity.
• Exhibit 2: Segmental analysis of Easyflight plc’s performance by geographical market.
• Exhibit 3: Investment Appraisal – France acquisition from 2017 onwards.
Exhibit 1: Extracts from Easyflight plc Annual Report for 2018
Over the past 20 years Easyflight plc has built the UK’s leading short-haul airline delivering market-leading returns to our shareholders. Our primary geographical segments based out of England and Scotland have continued to go from strength to strength, delivering a friendly, efficient service with low fares for our customers who benefit from our network of primary airports, routes and slots to make travel easy and affordable.FIN7040 Financial Decision Making Assessment Finance.
From this strong platform during 2017 and 2018 we made significant investment in France acquiring the assets (land, buildings and equipment) of a small local airline. This acquisition was a major strategic step.
We are pleased with this year’s results, particularly in this time of political change with its potential impact on currencies, which is significant for a business like ours, where the majority of our revenue comes in as sterling but most of the costs go out in euros.
We are committed to finding new ways to make travel easy and affordable, while growing our business, increasing our profitability and creating long-term value for our shareholders. To achieve these objectives, we align our efforts around the following growth strategies:
• Grow our presence in existing markets;
• Become Europe’s preferred short-haul airline;
• Continue to leverage our scale and market positions to enhance profitability
• Pursue a disciplined development strategy.
Financial Director’s Review
Our investment in France over the last two years has amounted to £3,000m including costs of purchase. These assets are included in our non-current assets. Initial results have proved challenging. We experienced a setback in acquiring all of the targeted facilities, which despite forecast for completion during 2017, were delayed in part until 2018. We did however manage to complete most of our conveyancing and associated legal work during 2017.
Sources of Revenue and Cost Structure
We are a primarily a service industry, yet we sell gifts, food, beverages and other items, so we hold inventories of such goods. We also hold inventories of fuel and that also forms a key element of our cost of sales.
Revenue comprises seat revenue, being the value of airline services (net of air passenger duty and similar charges, VAT and discounts), and non-seat revenue (sales of in-flight products and services).
Seat revenue arises from the sale of flight seats, including the provision of checked baggage, allocated seating, administration, credit card and change fees. Seat revenue is recognised when the service is provided, and generally when the flight takes place, but in the following cases, this is at the time of booking:
– administration and credit card fees as they are contractually non-refundable; and
– change fees as the service provided allows customers to change bookings.