Financial Analysis (FINA) | My Assignment Tutor

Page | 12020/21 SEMESTER [2]MODULE TITLE: Financial Analysis (FINA)TITLE OF ASSESSMENT: Assessment 2 (First sit): CourseworkLEVEL: H7COURSE(S): MBA (Full Time), MBA (Executive)DEADLINE DATE FORSUBMISSION BY STUDENT: Thursday 17th June 2021MARKS: 60%SUBMISSION LOCATION: Online (via Mybeckett)EXAMINER(S): Dr Anup Chowdhury and Dr Peter Djabang__________________________________________________________________________Notes for candidates:Hand in via MyBeckett as an MS word document via Turnitin (till 15:00 pm UK time) on 17thJune 2021 (Thursday).Page | 2Your report will be assessed as a whole in the following areas: Coverage of theoretical underpinnings involvedDemonstration of a critical understanding of the theoretical aspects involvedPractical application of the theoretical aspects of the case studyApplication of mathematical knowledgeEvidence of additional and relevant researchCoherence and quality of the report Page | 3IntroductionPut yourself in the following situation as a member of the Financial Services Team of DaffodilElectronics.You have been requested to provide meaningful financial analysis and information for decisionmaking concerning financing, performance, capital investment, constrain in production, budgetingand variance analysis. Accordingly, you are required to write a report (3,000 words in total)providing information about these areas.You must submit the report online via the Turnitin link by 15:00 pm (UK time) on 17th June2021 (Thursday). Please use the Harvard referencing where relevant, do not use lecture slides orany Pedia (such as Wikipedia or Investopedia) as reference. You should report your calculations andsupplementary information in Appendix. Don’t forget to mention your assumptions and thelimitations of your analysis.Financial analysis related to Investment Strategy:1. Daffodil Electronics has grown from a company with £10,000,000 turnover to one with a£201m turnover and £18m profit in the last twenty years. The existing owners have put all theirfinancial resources into the firm to enable it to grow. The directors wish to take advantage of afascinating market opportunity after Brexit but would need to find £50m of new equity capitalas the balance sheet is already over-geared (i.e. has high debt). The options are discussed in arelatively uniform way, including flotation on the Main Market of the London Stock Exchange,flotation on the Alternative Investment Market (AIM), and private equity. Write a report toenlighten the board on the merits and disadvantages of each of these three possibilities.(10 Marks)2. Ms Victoria is the Investment Manager and has requested some analysis concerning a proposed5-years investment. The company plans to open a showroom in York and have narrowed theirselection down to two locations: (1) City Centre and (2) Clifton Moor. You have to evaluatethese options based on the following information. Daffodil will lease the showroom initially for5 years, and the total initial cost of investment is estimated to be £10 million each.Page | 4Option one: City CentreIt is expected that the City Centre showroom will increase the overall sales revenue of thecompany by 10% per annum from 2020, and the variable cost will be forty-two percent of salesrevenue. The fixed overhead cost will be £3,500,000, £2,000,000 and £1,500,000 in the first,second, and third years. The promotion cost will be £500,000 in the first two years and£200,000 for the next three years. All other expenses will be 10% of the total contributionmargin. In the second year, the company will need a working capital investment of £2 million,and 60% of which will recover at the end of project life. The company follows a straight-linedepreciation method and expects to sell the assets at 20 % of historical cost in year 5.Option two: Clifton MoorOn the other hand, if the showroom is opened at Clifton Moor, then it will require fixedoverhead cost for four years £2,500,000 in year one, £1,800,000 in year three, £2,100,000 inyear four and £1,100,000 in year five. All other costs will increase and be at 10% per year of thecontribution margin. The working capital investment will be £1,500,000 in year three, and 55%of it will recover in the last year. The sales revenue will increase at 12% per annum, and variablecost will be 45% of sales. The company will follow a similar strategy for depreciation andpromotional cost, just like the city centre.Financing the investmentThe company has several choices for financing this expansion – issuing new equity or bond orusing existing retained earnings. The shares of Daffodil are traded in the Alternative InvestmentMarkets (AIM) for £30, however, the face value is £20 and last year’s dividend was £0.35.HSBC will charge a flotation cost of 10% to issue the new common stock in the market. Thereis a projection that the dividend will grow at 6% a year in the coming years. The firm can issuean additional long-term bond at an interest rate (before tax) of 10 % (i.e. Coupon rate).Currently, similar bonds are selling at £110, slightly over the face value (which is £100), withfive years of maturity. The market risk premium is 5%, the 3-month UK gilt rate is 3.5% (riskfree rate), and the average Beta of the Electronic goods industry is 1.73.The company is also planning to issue preferred stocks. The industry average preferred dividendand current market price are £10 and £96, respectively. The company wants to maintain acapital structure of approximately 45% debt, 5% preferred equity and 50% of ordinary equity.The current corporate tax rate is 35%.Page | 5Requireda) Determine the Weighted Average Cost of Capital (WACC) for target capital structure.b) Evaluate which showroom should be selected (Hints: use NPV and IRR). Ms Victoria prefersto use CAPM (i.e., Capital Asset Pricing Model) over DDM (i.e., Dividend DiscountModel).c) Advise accordingly with appropriate assumptions and rationales for the future.(5+10+5 = 20 Marks)[Following profit statement is provided for your reference to calculate the net cash benefitby your investment manager Ms Victoria] PROFIT STATEMENTS(£ million)Years20162017201820192020£££££Sales revenue176.200190.000199.110201.240201.545Cost of Sales28.62931.29432.11132.91932.382Gross profit147.571158.706166.999168.321169.163Fixed and semi-variable costsFixed overhead34.28340.87242.47844.01445.523Promotion5.0006.0007.0008.0009.000Research and Development6.0006.5007.0007.5008.000Depreciation31.50049.40051.35053.30055.250New model launch20.0000.0000.0000.000Professional charges8.0008.0008.0008.0008.000Stock upkeep0.0000.3620.3760.4720.504Total fixed and semi variable104.783111.134116.203121.286126.277Operating profit42.78847.57250.79547.03642.887Interest on loans15.00025.00030.00030.00015.000 Page | 6 Profit before tax27.78822.57220.79517.03627.887Tax9.7267.9007.2785.9629.760Profit after tax18.06214.67213.51711.07318.126Dividends10.00010.00010.00010.00010.000Retained earnings8.0624.6723.5171.0738.126 Financial Analysis for internal management:The management accounting team of Daffodil Electronics also come up with some questions andrequest you to explain/answer them for the upcoming board meeting:1 What is the point of distinguishing absorption and marginal costing? Why do they reportdifferent profits? Explain with an example. (5 Marks)2. The management of M&M, a subsidiary of Daffodil, is concerned about its inability toobtain enough trained labour to enable it to meet its current budgeted projection: ServiceABCTotalSales revenue473741125Variable costsMaterials86721Labour1181433Expenses54413Allocated fixed cost6151233Total cost303337100Profit174425 The available labour cost to spend is £23,000. All the labours are paid at the same hourlyrate across the services. You are requested to prepare a plan to produce a higher profit,ensuring that at least 50 per cent of the budgeted sales revenues could be achieved for eachservice.Prepare the statement, with explanations, showing the highest profit could beachieved from the limited amount of skilled labour available within the constraintstated. (10 Marks)Page | 7What steps could the business take to improve profitability in light of the labourshortage? (5 Marks)3. M&M makes Product E, the standard costs of which are: Sales Revenue£40Direct labour (1 hour)(13)Direct materials (1 kg)(12)Fixed overheads(5)Standard profit10 The budgeted output for March 2021 was 1,000 units; however, the actual production was 1,100units sold for £44,400. There were no inventories at the start or end of March.The actual production costs were:Direct labour (1,075 hours) £14,513Direct Materials (1,170 kg) 13,455Fixed overheads 5,700Calculate the variance for March from the available information and use them to reconcilethe budgeted and actual profit figures? (8 Marks)How will a flexible budget help this company to identify the budget variance? (2 Marks)Thank you and best of luck.Page | 8Feedback: Date generic feedback will beavailable:Within four weeks of the assessment period, subjectto the date set for the release of resultsDate provisional marks will beavailableWithin four weeks of the assessment period, subjectto the date set for the release of resultsHow provisional marks will bereturned to you:Posted on the module on MyBeckett.Date individual feedback willavailableFollowing the Examination Committee and thereturn of all scripts from the External ExaminerHow individual feedback will bereturned to you:By collection of assessments as directed by yourAdmin Team


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