Financing in a Business

Assignment Brief

As part of the formal assessment for the programme you are required to submit an Introduction to Finance assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

Learning Outcomes:

After completing the module, you should be able to:

1. Contrast the appropriateness of the different sources of finance to a business.
2. Explain the implications of finance as a resource within a business.
3. Produce simple financial statements in accordance with accepted principles.
4. Use financial information for decision making purposes.
5. Demonstrate a confident use of the financial terminology and conventions in communicating results.

Guidance

Your assignment should include: a title page containing your student number, the module name, the submission deadline and the exact word count of your submitted document; the appendices if relevant; and a reference list in AU Harvard system(s). You should address all the elements of the assignment task listed below. Please note that tutors will use the assessment criteria set out below in assessing your work.

You must not include your name in your submission because Arden University operates anonymous marking, which means that markers should not be aware of the identity of the student. However, please do not forget to include your STU number.

Maximum word count: 3,000 words

Please refer to the full word count policy which can be found in the Student Policies section here: Arden University | Regulatory Framework

Please note the following:

Students are required to indicate the exact word count on the title page of the assessment.

The word count includes everything in the main body of the assessment (including in text citations and references). The word count excludes numerical data in tables, figures, diagrams, footnotes, reference list and appendices. ALL other printed words ARE included in the word count.

Please note that exceeding the word count by over 10% will result in a 10-percentage point deduction.

Question 1

Liverton Co.’s income statement for the year ended 31 March 2019 and statements of financial position at 31 March 2019 and 2018 were as follows:

Liverton Co.: Income Statement for the year ended 31 March 2019
£’000
Sales 3 495
Cost of Sales (2 182)
Gross profit 1 313
Other income: interest received 33
Distribution costs (187)
Administrative expenses (309)
Interest costs (75)
Profit before tax 775
Income tax expense (157)
Profit for the year 618

Liverton Co: Statements of Financial Position as at 31 March 2019 and 2018
2019 2018
£’000 £’000
Non-current assets
Property, plant and equipment (PPE) 1 700 1 615
Intangible assets 425 375
Investments 0 95
Current assets
Inventory 150 102
Trade receivables 1 010 315
Short-term investments 75 0
Cash at Bank 452 1
Total Assets 3 812 2503
Current liabilities
Trade payables 289 119
Bank overdraft 143 98
Taxation 312 285
744 502
Non-current liabilities
Long-term loans 170 50
Total Net Assets 2898 1951

Equity
Share capital (£1 ordinary shares) 1950 1550

Share premium account 260 150
Revaluation surplus 70 51
Retained earnings 618 200
Total Equity 2 898 1 951

Required

a) Calculate for the financial year ended 31 March 2019 and, where possible, for 31 March 2018, the following ratios:

i) Gross profit margin
ii) Assets usage
iii) Current ratio
iv) Acid test
v) Inventories holding period
vi) Debt to Equity ratio

(12 Marks)

b) Critically explain the importance of considering the audience for financial statement analysis.
(13 Marks)

(Question 3 Total 25 Marks)

(LO: 3, 4 and 5)

Question 2

A group of friends have formed a new business called Sassy Clothing, an online and mail order clothing business, in which they have invested £200,000 of their own capital. They intend to manufacture and sell quality clothes. They have set the business up and are selling direct to the final consumer, using a combination of aggressive marketing across a range of different media and also with the use of an automated web site that accepts online orders. To support this, they also have a department of telephone sales and support staff ready to help customers. The sales staff work in teams and receive a basic salary plus commission for each successful sale. By the start of July 20X5, they have spent £150,000 on tangible non-current assets, and they currently have the remaining £50,000 in their business bank account.

They provide you with the following forecasted figures for their first 6 months of trading:

£

Sales for the next 6 months 1,175,000
Cost of the materials used up in sales 460,000
Labour costs for the 6 months 480,000
Other expenses for the 6 months, including marketing costs and £15,000 depreciation of tangible non-current assets 345,000

Their projected cash receipts and payments are estimated to be as follows:

Month (20X5) Sales receipts Payments for materials Labour and other expenses
£ £ £
July 150,000 120,000 These payments are divided equally over this six month period
August 120,000 100,000
September 150,000 60,000
October 210,000 60,000
November 260,000 60,000
December 285,000 60,000

In addition to the above, they expect to have to pay a tax bill of £20,000 in December 20X5. All transactions will go through their business bank account.

Required:

(a) Prepare an opening statement of financial position at the start of July 20X5.
(5 marks)

(b) Prepare a monthly cash flow forecast, showing the bank balance at the end of each of the 6 months and indicating what level of overdraft facilities the friends need to negotiate with their bank manager.
(18 marks)

(c) Explain what additional expense they should take into account as a result of needing the financial assistance (overdraft) referred to in (b).
(2 marks)

(Total marks: 25)
(LO: 1, 2, 3, 4 and 5)

Question 3
You are a Financial Planning and Control Manager at FreeAir Ltd, a leading manufacturer of fans used in air conditioning systems. The company is located in Liverpool, UK.

In the year ended 31 March 2019, manufacturing cost per unit comprised:
£
Direct material 125
Direct labour (20 minutes per unit) 15
Variable manufacturing overhead 20
Variable selling expenses 15
Variable administrative expenses 10

The company produced and sold 45,000 fans during the year ended 31 March 2019. The selling price per unit was £300.

Fixed overheads for the year ended 31 March 2019 were:
£000
Fixed manufacturing overheads 1,650
Fixed selling and distribution overheads 2,850
Fixed administrative overheads 930

Jessica Olusange, Chief Executive, has developed a new strategy for the business. The company has invested in a new manufacturing facility in Leicester, UK: this investment means that fixed costs will increase by £1,450,000 from 1 April 2019.

However, the move to the new manufacturing facility means that direct labour costs are expected to reduce by £2 per unit, variable manufacturing overheads will reduce by £0.50 per unit and variable administrative expenses will reduce by £2 per unit. Jessica believes that her new strategy will reduce the level of financial risk to which FreeAir Ltd is exposed.

From 1 April 2019, the selling price per unit of fans will be increased by 3 per cent. The company plans to produce and sell the same quantity of fans in the year ended 31 March 2020 as it did in the year ended 31 March 2019.

The company uses a marginal costing approach to support short term planning and decision making. As part of her new strategy, Jessica would like to develop a target costing approach. She plans to use the contribution margin ratio (also known as the profit – volume ratio) for fans for the year ended 31 March 2019 to determine the target cost per unit for the year ended 31 March 2019.

Required:

(a) Calculate the breakeven point in units and sales revenue for the year ended 31 March 2019 and the year ended 31 March 2020.
(9 marks)
(b) Calculate the margin of safety in units and sales revenue for the year ended 31 March 2019 and the year ended 31 March 2020.
(6 marks)
(c) Critically discuss the new strategy developed by Jessica. Use the results of your calculations in parts (a) and (b) to develop your response.
(10 marks)

(25 marks)

(LO: 4 and 5)
Question 4

The following information relates to three potential investment projects that are being considered by Scrappit plc. Due to capital rationing, only one of the three projects can be pursued.

Project A   Project B   Project C
£   £   £

Initial cost 175,000 195,000 190,000
Expected life 5 years 5 years 5 years
Scrap value expected 5,000 8,000 4,000
Expected cash inflows:
End of year 1 75,000 95,000 50,000
2 65,000 65,000 60,000
3 60,000 45,000 65,000
4 55,000 45,000 66,000
5 50,000 45,000 57,000

Additional information:

i. Scrappit plc estimates its cost of capital to be 18%.
ii. £35,000 depreciation is charged to Project A each year.
iii. £39,000 depreciation is charged to Project B each year.
iv. £38,000 depreciation is charged to Project C each year.

Required:

(a) Calculate the payback period, accounting rate of return and net present value of each of the potential projects.
(15 marks)

(b) Explain which of the three potential investment projects should be undertaken. Your explanation should be based on the results of your calculations in part (a).

(3 marks)

(c) Critically discuss the approaches to investment appraisal used in part (a). As part of your critical evaluation, identify what additional information might be used to improve the approach to investment appraisal.
(7 marks)

END OF QUESTIONS

(Total: 25 marks)
(LO: 3, 4 and 5)

Formative Feedback
You have the opportunity to submit a draft response to question one to receive formative feedback.

The feedback is designed to help you develop areas of your work and it helps you develop your skills as an independent learner.

If you are a distance learning student, you should submit your work, by email, to your tutor, no later than 2 weeks before the actual submission deadline. If you are a blended learning student, your tutor will give you a deadline for formative feedback and further details.

Formative feedback will not be given to work submitted after the above date or the date specified by your tutor – if a blended learning student.

Referencing Guidance

You MUST underpin your analysis and evaluation of the key issues with appropriate and wide ranging academic research and ensure this is referenced using the AU Harvard system.

Follow this link to find the referencing guides for your subject: Arden Library