UNIVERSITYOF SUNDERLAND
LEVEL M
MODULE: FINANCIAL MANAGEMENT & CONTROL
ASSIGNMENT CODE: PGBM
0
1
Submission Date:
Assessment weight:
10
0% of module
Outcomes Assessed: All module learning outcomes, knowledge and skills, are assessed in this assignment.
This assessment is in three parts, please answer all elements.
Please note that this is an individual assignment and the policy of the University on “Policy on Cheating, Collusion and Plagiarism” applies.
Please write your Tutor’s name clearly on the front of the assignment
.
Part A – GP Electricals Plc2
You are a financial analyst at GP Electricals Plc; a public limited company specialising in manufacturing and distributing electrical generators. The Board of Directors have looked into the financial statements of the company for the last two years and have raised concerns regarding both the company’s profitability and liquidity. The financial statements of GP Electricals for the last two years are given below:
Statement of Comprehensive Income for the year ended 31 December
20 20 |
2019 |
|||||||
£000 |
||||||||
Revenue |
38,550 |
29,950 |
||||||
Less: Cost of sales: |
||||||||
Opening Inventory |
3,875 |
4,535 |
||||||
Manufacturing costs |
22,140 |
13,250 |
||||||
26,0 15 |
17,785 |
|||||||
Less: Closing Inventory |
( 6,225 ) |
(3,875) |
||||||
(19,790) |
(13,910) |
|||||||
Gross profit |
18,760 |
16,040 |
||||||
Less: Expenses |
||||||||
Selling & distribution expenses |
8,135 |
4,380 |
||||||
Administrative expenses |
2,100 |
990 |
||||||
Bad debts written off |
1,040 |
565 |
||||||
(11,275) |
(5,935) |
|||||||
Operating profit |
7,485 |
10,105 |
||||||
Less: Interest payable |
(1,690) |
(380) |
||||||
Profit before tax |
5,795 |
9,725 |
||||||
Less: Income tax |
(900) |
(1,920) |
||||||
Profit after tax |
4,895 |
7,805 |
||||||
Less: Dividends paid |
(2,100) |
|||||||
Retained profit for the year |
2,795 |
5,705 |
Statement of Financial Position as at 31 December
Non-current assets (net) |
|||
Land and building |
24,590 |
19,280 |
|
Equipment |
3,200 |
||
Motor vehicles |
1,900 |
1,650 |
|
30,870 |
24,130 |
||
Current assets |
|||
Inventory |
6,225 | ||
Trade Receivables |
5,900 |
4,500 |
|
Cash |
0 |
560 |
|
12, 125 |
8,935 |
||
Current liabilities |
|||
Trade Payables |
(5,100) |
(4,885) |
|
Taxation |
(1200) |
(1,490) |
|
Bank overdraft |
(2,180) |
0 | |
Net current assets |
3,645 |
2,560 |
|
34,515 |
26,690 |
||
Non-current liabilities |
|||
Loan stock |
(4,575) |
(1,250) |
|
29,940 |
25,440 |
||
Equity |
|||
Ordinary shares of £1 each |
26,035 |
24,330 |
|
Accumulated profit |
3,905 |
1,110 |
Required:
1. Prepare a report for the Board of GP Electrical Plc. that evaluates the performance of GP Electrical in relation to profitability, liquidity, gearing, asset utilisation, and investor potential. Your report must be supported by the calculation of relevant ratios in the five evaluation areas mentioned above. (25%)
2. Calculate the Working Capital Cycle in days for GP Electrical Plc based on the information above, assuming 365 days, for the years 2020 and 2019 AND briefly comment on the company’s liquidity position in 2020 compared to 2019. (round to the nearest day) (5%)
3. Critically evaluate the limitations of using ratio analysis for both cross-sectional and time-series comparisons. (10%)
All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.
Total for Part A: 40%
Part B – Venmac Ltd
Vnemac Ltd is specialized in producing and selling ventilator machines. In 2019, the manufacturing cost per unit included:
£ |
|
Direct material |
125 |
Direct labor (20 minutes per unit) |
15/hour |
Variable manufacturing overhead |
20 |
Variable selling expenses |
15 |
Variable administrative expenses |
10 |
Fixed costs for the year ended 31 December 2019 were:
Fixed manufacturing |
|
Fixed selling and distribution |
2,850 |
Fixed administrative |
930 |
The company produced and sold 45,000 units at £300 per unit.
In 2020, management has decided to increase the selling price by 20% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2020. The company has produced and sold the same quantity in 2020 as last year.
Required:
1)
Calculate the break-even point and margin of safety in both units and revenue for the two years, 2019 and 2020, and briefly analyse the results. (10%)
2) Critically evaluate the key assumptions that underpin the break-even model, assessing and analysing whether the model can be applied within the context of today’s global business environment. (15%)
All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.
Total for Part B: 25%
Part C
Required:
1. Financial managers can fund potential investments and expansion plans through accessing a range of differing sources of finance. Explain and critically evaluate a single source of both internal and external finance that could be used by companies to finance further investment programmes. (15%)
2. “Most companies allocate the same resources to the same business units year after year. That makes it difficult to realize strategic goals and undermines performance”.
(Hall, Lovallo and Musters, 2012)
Required:
Critically evaluate the use of zero-based budgeting as a means of addressing the above problem in a challenging business environment. You are encouraged to use illustrative examples, to support your discussion. (20%)
Total for Part C: 35%
Notes:
1. To obtain a high mark, you should:
a) Make your report concise, precise and well presented and structured;
b) Draw logical conclusions from accounting information;
c) Synthesise information in a coherent and useful way;
d) Show evidence of key text and background reading;
e) Incorporate your knowledge into an integrated piece of work;
f) Demonstrate critical understanding of financial management.
2. A Harvard standard referencing is required for the report
3,500 words overall. (plus or minus 10%)
Running Head: GP PLC FM
GP PLC FM 23
GP Electrical PLC Financial Management
Name of Student
Course Title
Tutor
Date
Part A – GP Electrical PLC
Quiz 1
Report on Performance Evaluation.
a) Profitability analysis
To evaluate the GP Electrical profitability analysis, we will use profitability ratios to establish the ability to make a profit compared to revenue and balance sheet. Profitability ratios are categorized into two; margin ratios and return Ratio. (Chancellor, 2016).
Margin ratios are the companies ability to convert revenue to profits.
Return ratios are the company’s ability to generate returns on shareholder’s equity. They include; return on asset, return on investment capital, and return on equity.
We now calculate the margin ratios for GP Electricals PLC
i. Gross profit margin
This is a comparison of
Gross Profit Margin = (Net Sales – Cost of good sold) / Net Sales
= Gross Profit / Net Sales
Gross Profit Margin – 2019 = $16,040
$29,950
= 54%
Gross Profit Margin – 2020 = $18,760
$38,550
= 49%
ii. Overheads Ratios
Overheads Ratio = Overheads X 100
Net sales
Overheads Ratio – 2019 = $5,935 X 100
$29,950
= 20%
Overheads Ratios – 2020, = $11,275 X 100
$38,550
= 29%
iii. Operating Profit Margin
Operating Profit Margin Operating Profit / Net Sales
2019 $10,105
$29,950
34%
2020 $7,485
$38,550
= 19%
iv. EBITDA (Earning before interest, taxation depreciation and armortaisation)
EBITDA = Net income + Interest + Taxes + Depreciation + Amortization
EBITDA – 2019 = $7,805+$1,920+$380
= $10,105
EBITDA – 2020 = $4,895 + $900 + $1,690
= $7,485
The following are return ratios
i. Return on Assets (ROA)
ROA = Net Income/Average Assets
= $7805
($25,440+$29,940)/2
= 28%
ii. Return on Equity
ROE = Net Income / Equity
ROE 2019 = $7,805
$24,330
= 32%
ROE 2020= $4,895
$26,035
= 19%
Observation
General performance of the Company went down in 2020.
b) Liquidity Analysis – Working Capital Ratio
Liquidity ratio analysis is the use of ratios to establish an organization’s ability to pay its bills as they fall due by comparing liquid assets with short term liability.
1) Cash Ratio
Cash Ratio = Cash/Current liabilities
Cash Ratio 2019 = $560/$6,375
8.8%
Cash Ratio 2020 = 0/$8,480
0 (Zero)
2) Current Ratio
Current ratio = Current Assets /Current Liability
Current Ratio2019 = $8,935/$6,375
= 1.40
Current ratio 2020 = $12,125 / $8,480
= 1.43
3) Quick Ratio
Quick Ratio 2019 = Cash + Receivable)/Current Liabilities
= ($4,500+560)/$6,375
= 0.79
Quick Ratio 2020 = ($5,900+0)/$8,480
= 0.70
c) Gearing Ratio Analysis
Gearing ratio analysis is the use of ratios to measure leverage or borrowed funds against equity.
Debt Ratio
Debt ratio = Liabilites/Assets
Debt ratio – 2019 = $7,625/$33,065
= 23%
Debt ratio – 2020 = $13,055/$42,995
= 30%
Debt to Equity Ratio (D/E)
D/E = Total Liabilities/Total Equity
D/E 2019 = $7,625/$25,440
= 30%
D/E 2020 = $13,055/$29,940
= 44%
Times Interest Earned ratio (TIE)
TIE = EBIT/Interest Expense
TIE – 2019 = $10,105/$380
= 26.5
TIE – 2020 = $7,485/$1690
= 4.4
Equity Ratio
Equity Ratio = Total Equity/Total Assets
Equity Ratio 2019 = $25,440/$33,065
= 0.77
Equity Ratio 2020 = $29,940/$42,995
= 0.70
d) Asset Utilization
Asset utilization computes total revenue against company assets. A high asset utilization ratio demonstrates that the Campany is utilizing its assets resources efficiently.
Asset Utilization = Total Revenue/Avellage stock
Asset Utilization = $38,550/($24,130+$30,870)
= 1.4
e) Investor Potential – Return on Investment (ROI)
The investor potential ratio or return on investment measures the company’s capability to give adequate returns to the directors. ROI can be measured using the Return on Equity and Dividend cover.
Return on Equity = Net income /Average Equity
= $4,895/$27,690
= 0.18
Divided Cover = Net Income/Dividend
Dividend Cover 2019 = $7,805/$2,100
= 3.7
Dividend Cover 2020 = $4,895/$2,100
= 2.3
Observation
Similar observation as on ratio anlysi, general performance of the Company went down in 2020.
Quiz 2 of Part A
Working Capital Cycle (WCC) for GP Electrical PLC
WCC Days ratio = Receivable days+Inventory days–Payable Days
Receivable days = (Ending receivable/sales)xNumber of days
Inventory Days = (Ending Inventory / Cost of goods sold ) x Number of days
Payable days = (Ending Payable / Cost of goods sold ) x number of days
2019
Receivable days 2019 = ($4,500/$29,950) x 365
= 55 days
Inventory Days 2019 = ($3,875/$13,910)x 365
= 102 Days
Payable Days 2019 = ($4,885/13,910)x 365
= 128 Days
WCC days 2019 = 55 days+102 days – 128 days
= 29 Days
2020
Receivable Days 2020 = ($5,900/$38,550) x 365
= 56 days
Inventory Days 2020 = ($6,225/$19,790) x 365
= 115 Days
Payable Days 2020 = ($5,100/19,790) x 365
= 95 Days
WCC days 2020 = 56 days+115 days – 95 days
= 77 Days
Observation
Working Capital Cycle days increase in 2020 indicating that the company has reduced the collection in 2020. The company need to check the detoloriating financial performance in 2020.
Quiz 3 of Part 1
Cross-sectional and time-series comparisons
In cross-sectional analysis different firms have different economical levels and experiences making it unreasonable to compare them. Despite being in the same industry, companies will be in different economies of scale with younger firms experiencing higher production costs as compared to older and experienced firms. Therefore you can,t perform cross-section comparison without considering other fundamental factors affecting different companies.
In time series analysis, ratios fall short incorporating the effects of inflations which can differ over time. This may lead to making decisions based on inaccurate and unrealistic financial information. Similarly, different economic variables that can affect the performance of the firm can change over time but financial ratios fall short of incorporating them.
Part B
Quiz 1
Vnemac Ltd Break-even point
Break-even point (Units) = Fixed Cost/(Sales prices per unit–Variable Cost per Unit)
2019 – units produced 45,000
Fixed cost; –
Manufacturing GBP1,650,000
Selling and distribution GBP2,850,000
Administration GBP930,000
Total Fixed Cost GBP5,430,000
Variable Cost; –
Direct materials 125
Direct Labour ((20/60) x15) 5
Manufacturing overhead 20
Selling expense 15
Administrative expense 10
Total Variable Costs 175
Therefore Break-even point = 5,430,000 / (300-175)
= 43,440 unit
2020
Current Fixed costs GBP5,430,000
Additional Costs GBP1,450,000
Total fixed cost GBP6,880,000
Current selling Price GBP300
Addition price (300*0.20) GBP60
Total Selling price GBP360
Therefore Break-even point = 6,880,000/(360-175)
= 37,189
Observation
There was a decrease in the break-even point in 2020 indicating better performance and profits.
Break-even point (revenue) 2019
Break-even point is 43,440 units
Break-even revenue = 43,440×300
= GBP 13,032,000
Break-even point (revenue) 2020
Break-even point is 37,189 units
Break-even revenue = 37,189×360
= GBP 13,388,040
Observation
Despite year 2020 having a lower break-even point units, it has a higher break-even revenue point.
Quiz 2 of part B
Assumptions that underpin the break-even model
Once the break-even point is met, in the assumption that no alteration in selling price, the variable cost and fixed, a profit in the amount of the difference in the selling price, and the variable costs will be recognized, one crucial feature of break-even study is that it usually is not this simple. In several cases, the fixed costs, selling price, or variable costs will not remain constant, resulting in an alteration in the break-even. And these variations will alter the break-even. So, a break-even cannot be premeditated only once. It should be premeditated frequently to replicate variations in costs and prices and to uphold accomplishment or make changes in the product line.
Break-even study adopts the associations among variable expenses, sales revenues, and volume (in units) is linear. Though, such a connection is non-linear in the actual world. To attain high sales volumes, companies would often lower sales prices. Furthermore, labor and material costs can drop at higher dimensions of production, owing to labor specialty and buying discounts provided for purchasing in large sums. In contrast, spoilage, scrap, and rework costs might increase at high volumes of production. Moreover, staff may be needed to work night shifts and extra time.
Break-even study imagines that total fixed cost remains persistent irrespective of the vast variations in the level of action. Fixed costs, though, may vary with substantial variations in capacities. For instance, if a machine can yield 40,000 units per year, selling and producing 50,000 units would need two machines. Hence, fixed costs are named stepped costs. Moreover, total fixed cost is collected of several fixed elements as supervisor salary, machine depreciation, and rent. Barely any corporate currently would provide only a single product. (Dept, I. M. F. E. R. 2017). Hence, the break-even study becomes further complex when the business produces numerous products.
Part C
Quiz 1
Internal and external finance
Sourcing cash can be done for many reasons. Traditional parts of necessity might be for capital asset attainment – modern equipment or the erection of a new depot or building. The advancement of new goods can be extremely expensive, and now again, money might be needed. Usually, such growths get from funds inside, while payment for the attainment of machinery might come from outside bases. In this time and age of constricted liquidity, various companies have to look for short term capital in the way of overdraft or loans to offer a cash flow cushion. Interest charges may differ from company to company and also rendering to the purpose. A business encounters three main matters when choosing a suitable basis of money for a new scheme: one, can the money be raised from inside funds, or will new funds have to be elevated external the corporate? Two, if cash requires raising externally, would it be equity or debt? Three, if exterior equity of debt is to be in use, where would it be built from, and in what procedure? (Ralston et al, 2015)
Can the required money be offered from internal bases? in reply to this query, the business requires too frequent deliberate matters: How much money is presently on hold? The firm expects to deliberate the sum held in present money balances and short-term funds, and how much of this will be essential to fund current operations. If extra money exists, this is the complete vibrant basis of investment for the intended development. If the needed payment cannot be offered in this mode, then the business ought to reflect its incoming cash flow. A money budget can be arranged, but it is perhaps too thorough at this step. A cash flow report could be further applied. If the business’s expected cash flow is not enough to fund the new project, then it would reflect narrowing its control of working investment to advance its money situation.
If providing the needed money can’t be done within, then the business has to deliberate raising capital from external sources.
The equity or debt decision
At this stage, a business requires to deliberate the amount it must borrow. It is a crucial choice, and numerous British firms have gone through significant difficulties with this verdict in current years. Matters to be measure contain the price of the investment. Debt business is typically economical than equity investment. It is for debt investment is safer from a financier’s viewpoint. Interest need payment before the dividend. In the occasion of insolvency, debt money is waged off before equity. It makes debt a safer asset than equity, and henceforth debt stakeholders call for a lower rate of return than equity stockholders. Debt interest is also company tax-deductible (different from equity dividends), making it even economical to a taxpaying business. Preparation expenses are generally lower on debt finance than equity finance, and again, different from equity preparation expenses, and they are also tax-deductible.
Business risk. It states to the instability of working profit. Businesses with unstable working profit would evade massive levels of loans as they might get in a situation where working revenue drops, and they can’t meet the interest charge. High-risk schemes usually are funded by equity finance, as there is no lawful duty to pay equity dividends. Operating gearing-it terms to the part of a business’s working expenses that are secure as different to a variable. The higher the operating gearing, the higher the ratio of fixed expenses. Corporations with steep operating gearing incline to have unstable working profits. It is for fixed costs that remain similar, regardless of the capacity of sales. Therefore, if sales grow, working profit grows by a higher ratio. Then if sales capacity drops, working profit drops by a higher fraction. Usually, it is a high-risk strategy to join high economic gearing with high working gearing. High operating gearing is typical in several service businesses where several working expenses are fixed.
Reduction of earnings per share (EPS)- Huge matters of equity might lead to a decrease in EPS if incomes from new projects are not instant. It might trouble stockholders and lead to dropping share values—voting switch. A big question of stocks to original stockholders might change the voting control of a corporate. If the formation holders hold over 50% of the equity, they might be hesitant to vend new stocks to external stockholders as their voting control at the annual general meeting might be gone. The present situation of equity markets- in a time of dropping stock fees, several firms will be hesitant to sell new stocks. They sense the amount in hand will be too little. It will spoil the prosperity of the current holders. Note this does not apply to rights matters where stocks are traded to the current holders of the business. New subjects of stocks on the UK stock exchanges have been occasional over the previous few years owing to the stand market. There is some indication that the bear market is coming to an end.
After deliberation of the above opinions, the business will be in a situation to choose amongst the use of equity or debt finance. The final chief choice is what type of funding must be in use, and where must it be raised?
Equity investment, a thorough deliberation of the diverse bases of equity investment, is past the choice, here are a few overall arguments on the issue. The present position of the business is essential. Corporations registered on the London International Stock Exchange or cited on the Alternative Investment Market (AIM) may increase new equity investment by vending new stocks on these markets employing offers for sale, rights issues, or place. Other businesses that lack entree to the stock exchange find it more trying to raise equity investment and might require to convert to project financiers if they need equity investment.
Debt investment- derives in several, unlike procedures. The primary deliberations in raising new debt investment are thorough below.
The period of finance,
Typically, short-term borrowing, i.e., not exceeding one year, is economical than longer-term borrowing, i.e., loans exceeding one year. It is for various financiers to equate period with risk. The longer the loan for, the increased risk is tangled as more issues can be wrong. Asa result, they charge a high-interest amount on extensive-term loaning than on short-term loaning. Nevertheless, short-term loaning has a significant drawback – regeneration risk. Short-term lends have to be in renewal often, and the organization conveys the risk that financiers might not agree to extend additional credit. This danger is at its maximum on overdraft borrowing, where the bank may call in the overdraft’ on-demand.’ With long-term borrowing, provided the debtor does not break the debt agreements involved, the finance is particular for the length of the credit.
Position of the corporation
Some kinds of debt finance are only accessible to big registered corporations. There are restrictions for small companies to short-term borrowing. If long-term debt investment is accessible, it is typically in the form of sale, hire purchase, leasing, and leaseback, or mortgage loans on a property.
Quiz 2 of Part C
Zero-Based Budgeting (ZBB)
It is a way of planning in which all expenditures must be right for each new period. The procedure of zero-based preparation begins from a “zero base,” each role in an association is examined for its requirements and costs. Finances then made around what is required for a future period, regardless of whether the budget is lower or higher than the earlier one. Here’s how to overcome resource-distribution Inertia. Inertia might impact the circulation of additional rare possessions, like marketing expenditure.( Hall et al, 2012)
Here are ways to overcome Inertia
Have a target company portfolio, when it comes to evolving a provision plan; it’s supportive of having a goal collection in mind. A lot of businesses fight this for clear explanations: it needs extra persuasions to define strategic portfolio variations in everything, but the unclear standings and the right responses may vary if the broader corporate atmosphere turns out to be unlike the predictable one. It is just a starting point to set targets; businesses too require methods for adjusting and revisiting them over a period. Gaging rearrangement performance comparative to peers also can help enterprises to set goals. As of 1990 to 2009, for instance, Honeywell transferred about 25 per hundred of its capital as it moved away from current corporate areas to air conditioning, controls, and aerospace. Honeywell’s opponent Danaher, which was in the same businesses in 1990, changed 66 percent of its capital into new ones through a similar period. The two corporations attained earnings above the industry average in these years—TRS for Danaher 25 percent, and Honeywell was 14 percent.
Use every available resource reallocation gears.
In certainty, allocation contains four essential activities: seeding, nurturing, pruning, and harvesting. Seeding is in going to new commercial parts, whether over attainment or an organic start-up venture. Nurturing includes building up a current corporate over ensuing investments, containing bolt-on purchases. Pruning takes resources away from the present corporate, by giving some of its yearly capital allocations to others or by putting a share of the corporate up for sale. Lastly, harvesting is vending entire productions that no longer appropriate a business’s portfolio or undertaking equity spin-offs.
Adopting simple guidelines to interrupt the status quo
Simple choice directions can aid in minimizing political wrangling since they alter the load of proof from the default distribution to one that brands it impossible to uphold the status quo. For instance, a simple harvesting rule may include putting a certain fraction of an institution’s portfolio up for sale every year to sustain vibrancy and to reject deadwood.
References
Dept, I. M. F. E. R. (2017). Finance and Development. International Monetary Fund.
Hall, S., Musters, R., & Lovallo, D. (December 01, 2012). How to put your money where your strategy is. Mckinsey Quarterly, 2, 28-38.
Ralston, J., Dimoff, D., Poché, M., Poole, W., Films for the Humanities & Sciences (Firm),, MotionMasters (Firm),, & Films Media Group,. (2015). Ratio analysis.
n Chancellor, E. (2016). Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15.