Chelsea Plc has embarked on a programme of growth | My Assignment Tutor

Chelsea Plc has embarked on a programme of growth through acquisitions and has identified Kensington Ltd and Wimbledon Ltd as companies in the same industrial sector as potential targets. Using recent financial statements of both Kensington and Wimbledon and further information obtained from a trade association, Chelsea has managed to build up the following comparability report Profitability ratios Kensington Wimbledon Industry Average ROCE before tax % 22 28 20 Return on Equity 18 22 15 Net Profit Margin % 11 5 7 Gross Profit ratio % 25 12 20 Activity Ratios Kensington Wimbledon Industry Average Total Assets turnover 1.5 4 2.5 Non current asset turnover 2.3 12 5.1 Receivables collection period 8 5.1 6.5 Inventory holding period 21 4 13 Liquidity ratios Kensington Wimbledon Industry Average Current Ratio 1.8 1.7 2.8 Acid test 0.5 0.9 1.3 Debt-equity ratio % 80 20 65 Required 1. Prepare a performance report for the two companies for consideration by the directors of Chelsea Plc indicating which of the two companies you consider to be a better acquisition, the directors require an analysis of these ratios and explanation (20 Marks) 2. Indicate what other information is needed before a final decision can be made (10 Marks)  Riverside Motorcycle Components Ltd has carried out some research that shows that the business could provide a standard service that it has recently developed. Provision of the service would require investment in a machine that would cost £100,000 payable immediately. Sales of the service would take place throughout the next five years. At the end of that time, it is estimated that the machine could be sold for £20,000. Sales of the service would be expected to occur as follows: Number of units Next year (year 1) 5,000 Second year 10,000 Third year 15,000 Fourth year 15,000 Fifth year 5,000 It is estimated that the new service can be sold for £12 a unit, and that the relevant variable costs will total £8 per unit. The company’s cost of capital is 12%. Required: 1) Calculate the annual cash flows for each of the five years. (10 Marks) 2) Using the investment appraisal methods calculate the ARR, Payback, NPV and IRR                                                                                        (10 Marks) 3) Advise the client on whether this project should be accepted or rejected based on methods used above .                                                        (20 Marks)  Pedrosa Plc is a small wholesale business, the bookkeeper who usually maintains the accounts has been taken sick, one of the tasks that had been given to the other staff who are covering the role is that of the cash budget, Unfortunately the other staff have no experience of producing budgets. The directors have very kindly asked if it is something you could do for them. Pedrosa plc provides the following forecast information for the 6 months ending 31 December 2014 ££££££ JulyAugustSeptemberOctoberNovemberDecember Sales 65,300 67,650 60,400 58,500 55,500 64,600 Purchases 35,400 33,600 32,600 34,750 35,650 35,600 •    Cash sales are usually 40 per cent of total sales. The remainder are supplied on one month’s credit. •    Suppliers allow a one month credit period. •    There is rent received income each month of £9,000. •    Wages are paid in the month they are due: £18,000 for July, August, September and October with a 6 per cent increase for November and December. •    There is a depreciation charge of £2,500 per month. •    An interim dividend of £16,000 is to be paid on 1 September • New machinery costing £50,000 is to be purchased on 1 October. The company will pay a 25% deposit in October, and then pay the rest over the next six months, spreading the cost equally over this time. Required: 1. You are required to prepare a cash budget for the four months August to November 2014. The opening cash balance at 1 August 2014 is £15,400. (15 Marks) 2. Budgeting is one of the areas that the management are keen to improve on, could you provide an explanation of why budgeting is beneficial to a business and what can be done to enhance the budgeting process?                   (15 Marks)  Assessment Submission


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