BFK450 Financial Analysis Coursework Portfolio

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Assignment Details:

• Words: 2500

 

Task 1: Financial Analysis 

 

The Board of Directors has asked you to perform a review of the financial performance and financial position of the business based on the company’s 2033 financial statements and key financial ratios, and using any other available information which you consider to be relevant.

 

Required:

 

Prepare a report for the Board of Directors in which you analyse the company’s financial performance and financial position, and which specifically addresses the company’s profitability, efficiency, liquidity and stability.

 

You should provide an appendix to your report in which you provide full workings for the following 12 key financial ratios for your business for 2033:

 

1. Return on capital employed
2. Operating profit margin ratio
3. Gross profit margin ratio
4. Operating expenses to sales ratio
5. Sales revenue on capital employed
6. Inventory holding period
7. Receivables days
8. Payables days
9. Current ratio
10. Acid test ratio
11. Gearing ratio
12. Interest cover

 

You should incorporate 8 of the above key financial ratios within the body of your report including the following 3:

 

1. Return on capital employed
2. Gross profit margin ratio
3. Gearing ratio

 

Note: Most members of the Board of Directors do not have a finance background so your report will need to include clear and appropriate explanations of the financial techniques and concepts which you have used in your analysis.

 

Word limit: 1,200 words excluding headings, sub-headings, tables, charts and appendices. Font Size: 12. Line Spacing: 1 ½.

 

Task 2: Evaluation of Product Recyclability Investment Opportunity

 

Your company’s Board of Directors is considering whether to launch a new recyclable model of robot in 2035 (‘Model 2’) and you have been asked to:

 

• evaluate the financial merits of this opportunity;
• to make a recommendation to management regarding whether this investment decision should be implemented; and
• to identify what other issues beyond your financial appraisal should be considered before a final decision is made.

 

The new model will require an investment in R&D of W$2m, all of which will be treated as Development costs. To produce the new model, capital expenditure of W$600,000 and 5 extra production employees will also be required.

 

The materials for this new model will cost W$100 per unit more than those for non- recyclable robots.

 

Following the results of a market research study which has already been carried out at a cost W$20,000, assuming your business maintains its retail sales price at the level set in 2034 there will be an increase in sales (compared with the level achieved in 2034) over the next five years as shown below:

 

Year 1            +200 units (compared with 2034)

Year 2            +250 units (compared with 2034)

Year 3            +300 units (compared with 2034)

Year 4            +350 units (compared with 2034)

Year 5            +400 units (compared with 2034)

 

Your company will need to carry out a technical feasibility study for the project at a cost of W$10,000. If the investment does go ahead then the production of the new model will require the use of factory space which could otherwise be sub-let for annual income of W$25,000. Also, it is estimated that the project will result in an increase in fixed overheads of W$15,000 per annum.

 

Your company usually evaluates investment opportunities over a 5-year timescale and applies the following decision criteria:

 

1. Payback period within 5 years
2. Positive net present value

 

Your business has in the past applied the following assumptions when evaluating capital investment projects:

 

1. an allowance for general fixed costs of 8% of the extra revenue arising from the project be included in the analysis representing an allocation for general administration and overhead
2. a cost of capital of 11% has been applied.

 

Task Details/Description:

 

Prepare a brief report for the Board of Directors which evaluates the financial merits of this investment opportunity. Your report should address the following detailed requirements:

 

• Perform a financial evaluation of this investment (A table highlighting the relevant cash flows together with detailed workings to support your net present value and payback calculations should be presented in an appendix).
• Using the table below, explain your reasoning for the treatment of the items specifically referred to in the narrative above as ‘relevant cash flows’ or (This table should be included in your main report and not in an appendix).

 

	Item	Relevant Cash Flow? (Yes or No)	Rationale for Treatment as Relevant or Otherwise
1	Cost of R & D Project of W$2m
2	Amortisation of R&D Project Costs
3	Capital expenditure of W$600,000
4	Depreciation of capital expenditure
5	Cost of employing 5 extra production staff
6	Cost of market research study of W$20,000
7	Cost of technical feasibility study of W$10,000
8	Factory rental income of W$25,000 per annum
9	Increase in fixed overheads of W$15,000 per annum
10	Allowance for general fixed costs of 8% of revenue per annum

 

• Identify and briefly explain two non-financial considerations which you believe should be taken into account before a final decision is
• Provide a clear recommendation to the Board as to whether this project should go ahead.
• Provide a list of any assumptions you have made in an appendix.

 

2030 Results

 

STATEMENT OF PROFIT OR LOSS				STATEMENT OF FINANCIAL POSITION
		W$000	W$000					W$000	W$000
REVENUE			5916	NON CURRENT ASSETS:
Materials		-3402		Property, plant & equipment				2160
Direct labour		-1155		Development costs				0
COST OF SALES			-4557	Investments				0
				Total Non Current Assets					2160
GROSS PROFIT			1359
OPERATING EXPENSES:				CURRENT ASSETS:
R & D		-300		Inventory				989
Marketing		-110		Receivables				1459
Administration		-278		Prepayments				0
Overheads		-822		Cash at bank				0000
Total Expenses			-1510	Total Current Assets					2448
				TOTAL ASSETS					4608
OPERATING PROFIT			-151
Investment income		0		CURRENT LIABILITIES:
Interest receivable		0		Payables				1163
Interest payable		-182		Bank overdraft				78
NET FINANCE COST			-182	Accruals				0
				Provisions				0
PROFIT BEFORE TAX			-333	Total Current Liabilities					1241
TAXATION			-0
				NON CURRENT LIABILITIES
PROFIT FOR THE YEAR		-333		Long term loan				1000
				Total Non Current			Liabilities		1000
				TOTAL LIABILITIES					2241
STATEMENT OF CASH FLOWS				NET ASSETS					2367
Operating profit		-0151
Add: Depreciation		+0240		EQUITY:
Add: Amortisation		+0000		Share capital					120
Change in working capital:				Share premium					0
1. Inventory change			-0373	Retained profits				2247
2. Receivables change			+0241
3. Prepayments change			+0000	TOTAL EQUITY				2367
4. Payables change			+0163
5. Accruals change			+0000
6. Provisions change			+0000	PERFORMANCE INDICATORS
Total change in working	capital		+0031
Cash generated from operations			+0120	Staff	Morale		6
Finance income received			+0000	Staff	Skills		5
Finance expenses paid			-0182	Staff	Turnover	(%)	8
Tax paid                          -0000				Product Quality				5
Net cash flow from operations     -0062				Consumer Satisfaction				5
				Retailer Satisfaction				5
Less: Purchase of PP&E            -0000				Brand Awareness (%)				10
Less: Purchase of intangible assets -0
Less: Amount spent on investments -0000

 

 

Add: Investment income received	+0000
Net cash flow from investing	+0000
Proceeds from share issue	+0000
Draw down (repayment) of loan	+1000
Dividend paid	-0000
Net cash flow from financing	+1000
Net Cash Flow	+938

 

STATEMENT OF PROFIT OR LOSS                            STATEMENT OF FINANCIAL POSITION

 

REVENUE	W$000	W$000 9000	NON CURRENT ASSETS:	W$000	W$000
Materials	-3896		Property, plant & equipment	2575
Direct labour	-1438		Development costs	396
COST OF SALES   GROSS PROFIT		-5334   3666	Investments Total Non Current Assets	0	2971
OPERATING EXPENSES:			CURRENT ASSETS:
R & D	-240		Inventory	90
Marketing	-160		Receivables	1479
Administration	-310		Prepayments	0
Overheads Total Expenses	-839	-1549	Cash at bank Total Current Assets	01486	3055
OPERATING PROFIT		2117	TOTAL ASSETS		6026
Investment income	0		CURRENT LIABILITIES:
Interest receivable	15		Payables	1645
Interest payable	-80		Bank overdraft	0
NET FINANCE COST		-65	Accruals	0
PROFIT BEFORE TAX		2052	Provisions Total Current Liabilities	0	1645
TAXATION		-530	NON CURRENT LIABILITIES
PROFIT FOR THE YEAR		1522	Long term loan Total Non Current Liabilities	1000	1000
			TOTAL LIABILITIES		2645
STATEMENT OF CASH FLOWS			NET ASSETS		3381
Operating profit		+2117	EQUITY:
Add: Depreciation		+0175	Share capital		120
Add: Amortisation		+0120	Share premium		0
Change in working capital: 1. Inventory change		-0090	Retained profits		3261
2. Receivables change		+0420	TOTAL EQUITY		3381
3. Prepayments change		+0000
4. Payables change		+0515
5. Accruals change		+0000
6. Provisions change		+0000	PERFORMANCE INDICATORS
Total change in working capital		+0845
Cash generated from operations		+3257	Staff Morale	5
Finance income received		+0015	Staff Skills	6
Finance expenses paid		-0080	Staff Turnover (%)	13
Tax paid		-0530	Product Quality	5
Net cash flow from operations		+2662	Consumer Satisfaction	5
			Retailer Satisfaction	7
Less: Purchase of PP&E		-1000	Brand Awareness (%)	10
Less: Purchase of intangible assets		-0180
Less: Amount spent on investments		0000
Add: Investment income received		+0000
Net cash flow from investing		-1180
Proceeds from share issue		+0000
Draw down (repayment) of loan		+0000
Dividend paid		-0304
Net cash flow from financing		-0304
Net Cash Flow		+1178

 

 

KEY FINANCIAL RATIOS & METRICS                            SUPPLY AND DEMAND

 

Share Price	(W$)	22	Sales Volume (units)	1771
			Lost Sales (units)	0
			Production (units)	1801
			Total Capacity (units)	1870

 

GROSS PROFIT PER UNIT ANALYSIS (W$)

 

Net sales price                                5081

 

Material cost		2200
Direct labour	cost	812
Total cost		3012

 

Gross profit                                      2069

 

MARKET SUMMARY

 

Team 1      Team 2 Supply: Production (units)          1801                     1600					Team 3      Team 4   1940         1790		Team 5   1801
Closing Inventory (units) 284                          439					763          0		30
Lost Sales (units)          0                           0					0            1479		0
Salaries (W$000 p.p. p.a.) 12.0                        10.8					10.0         10.5		11.0
Demand: Price                       7000                     7500					7000         6750		6600
Special Order Price         0                           0					0            0		0
Market Share (%)            19.3                     20.6					14.9         22.7		22.5
Sales Volume (units)        1517                     1622					1177         1790		1771
Special Order Volume        0                           0 N.B. Special Order contracts are excluded from				the	0            0 Sales numbers & Market		0 Share calculations
Financials (W$000):
Revenue		8495	9002	6097		9304	9000
Profit After	Tax	748	948	985		877	1522
Net Assets		3314	3908	3411		3904	3381
Bank Overdraft		619	1062

 

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