Managing Financial Resources and Decision Making

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Scenario 01

Mr. Mark Stephens is an Entrepreneur from London who is willing to start up a new venture in New Castle. As the tourism industry is booming and due market potential, he is interested to invest money in tourism industry. Two other investors are also agreed about the business proposal. Company name is registered as a Heavenly Resorts.

Task 01: Understand the sources of finance available to a business

• Identify and explain the sources of finance available for the new investment of Mr. Mark Stephens.
• Assess the implications of different sources of finance identified for the task 1.1( it should be highlighted in terms of risk, accessibility, cost ,duration, security etc)
• Evaluate the appropriate sources of finance forthe proposed investment

Task 2: Explore the sources of finance available to Heavenly Resorts

After 10 years period of time, Company is registered as public listed company in the London Stock Exchange share market. Following market information’s are given for your evaluation.

2.1. Capital structure of the Heavenly Resorts shows following status at 31/March/2016.

Ordinary share capital GBP 1.00 each 1,000,000

Bank borrowings 15% GBP 500,000.00

Debentures 22% GBP 50.00 each GBP 500,000

Market value per ordinary share GBP 1.50

Dividend per Ordinary Share GBP 00.42

Return on Equity 28% (Rf-15%, Rm-31.25%, SD/Beta 0.8)

Market value per debenture GBP 85.00

Corporation tax rate 30%

 

Calculate company overall cost of capital or WACC

Analyze the costs associate with each sources of finance for the Heavenly Resortsplc. Your answer should be supported by the cost of capital for each of the above sources and conclusion about WACC.

2.2 Explain the importance of proper financial planning toHeavenly Resorts plc.

2.3 Asses the stakeholders ofHeavenly Resorts plc and their impact to the current business operation.

2.4 Explain the impact of appropriate sources finance (Both capital and cost of capital) identified in task 1.3on the financial statements. You are required to explain how it is recorded in the financial statements with clear formats to justify it.

Task 03: Make a financial decision based on the financial information.

3.1 Prepare a cash flow budget and performance report for a given scenario and recommend the management on the possible remedies available to overcome the cash flow issues and the adverse variances. (Remedies are required to justified)

Heavenly Resorts Plc restaurant transactions are below. The following sales are expected over the next six-month period from May to October.

–	Purchases	Sales
May	£12,000	£17,000
Jun	£14,000	£22,000
Jul	£13,000	£18,000
Aug	£14,000	£14,000
Sep	£15,000	£16,000
Oct	£18,000	£18,000

 

• Wages are paid each month of £1,000 which are paid in month that they are incurred.
• Overhead expenses are due each month of £800 and these are paid one month in arrears.
• On 1 June, a new van is purchased for £8,000. The old van is sold on 15 July for £1,500.
• Sales are all on credit and we allow a -month credit period
• Half of the purchases are on credit – we are allowed a month credit period
• The balance at the bank as at 30 April was £1000 (overdrawn)
• Produce a cash budget for the four-month period ending 30^th

3.2. Heavenly Resorts is planning to expand their products portfolio in next budget period. Company chief chef is proposing two menus targeting the session.

Golden Syrup pudding

Menu ingredient requirement is given in the first table. Labour cost allocated to each menu is 5 pounds. Fixed cost per menu 2.00 pounds. Budgeted sales menu per month is 1500 menus. Target profit is 1000 pounds per month.

Chicken with avocado

Menu ingredient requirement is given in the second table. Labour cost allocated to each menu is 5 pounds. Fixed per menu 2.00 pounds.

Company is adding 60% gross profit margin for any new menu is developed. General fixed overhead of the hotel per month is 2000 pounds. Budgeted sales menu per month is 800 menus. Target profit is 1000 pounds per month.

Carry out Cost-volume- profit (CVP) analysis for the Heavenly Resortsand explain the outcome of the each figure you calculated to make a decision. Answer should highlight the selling price, cost, breakeven point, margin of safety, C/S ratio and target profit.

3.3

3. Explain the importance of investment appraisal (P3.3)
4. Explain the available techniques to appraise an investment (P3.3)
5. Evaluate each technique from the investors point of view (P3.3, M1, D1)
6. Identify the Net Present Value of the above project (P3.3, M1)

Year	Cash Flow (£)	Discount Factor (5%)	Present Value (£) (CF x DF)
0	– 800,000
1	+56,000
2	+700,000
3	+150,000
4	+90,000
5	+210,000
6	+250,000
Total

Task 04: Analysis and evaluate the financial performance of a business.

4.1. Explain the main financial statements prepared by a public quoted company and identify the purpose of each statement.

Students are required to refer an annual report of any listed company in the world and refer your answer to the components of the financial statements. Copies of the financial statements should be attached to the final assignment.

4.2 Explain how financial statements of Heavenly Resorts Plcare differing from financial statements of the following business organization.

• Partnership business
• Sole proprietorship business
• Nonprofit organization

4.3 The following is the balance sheet of a partner company of Heavenly Resorts

Balance Sheet as on 31 March
(GBP)
LIABILITIES	2010	2011	2012	2013	2014
Equity
Paid-up equity capital	29.77	29.77	29.8	31.4	31.4
Profit or Loss	475.77	512.65	522.2	429.8	508.1
	505.54	542.42	552	461.2	539.5
Borrowings	228.93	52.09	266.3	442.9	405.7
Other longterm liabilities	0	0	39.5	90.5	107.2
Current liabilities & provisions
Sundry creditors	75.87	66.92	75.9	155.8	164.6
Other current liabilities	18.98	6.2	9.2	16.5	17.3
Provisions	19.38	23.62	25.3	37	57.1
	114.23	96.74	110.4	209.3	239
Total liabilities	848.7	691.25	968.2	1,203.90	1,291.40
ASSETS
Gross fixed assets
Land & building	65.94	77.87	82.3	222	206.5
Plant & machinery	117.87	144.18	183.9	296.3	338.6
Furnitures and fittings	27.34	34.66	30.7	47.1	50
Other fixed assets	24.93	24.69	45.2	29	41.6
	236.08	281.4	342.1	594.4	636.7
Less: cummulative depreciation	20.98	33.52	48.1	113.4	136.1
Net fixed assets	215.1	247.88	294	481	500.6
Investments	10.09	176.64	188.2	94.8	153.9
Inventories
Raw materials and stores	27.78	27.94	30.9	65.3	56.1
Finished goods	32.81	39.9	47.4	71.9	70.3
Other goods	10.11	15.9	27.4	38.4	33.9
	70.7	83.74	105.7	175.6	160.3
Receivables
Sundry debtors	59.13	51.61	66.9	136.8	165.9
Others	62.31	74.98	218.5	82.6	70.1
	121.44	126.59	285.4	219.4	236
Cash & bank balance	378.66	41.87	5.7	9	37.2
Intangible Assets	52.71	14.53	89.2	224.1	203.4
Total assets	848.7	690.25	968.2	1,203.90	1,291.40
Income Statement	2000	2001	2002	2003	2004
Sales	1161.19	1192.15	1273.25	978.5	1169.5
Cost of sale	560.22	580.9	600.25	459.2	558.9
Other Expenditure	125.2	98.6	150.8	89.5	102.5
Profit	475.77	512.65	522.2	429.8	508.1

1. Calculate the following ratios for the above company as of the above years (P4.2, M1, D2)

1. Current ratio
2. Quick ratio
3. Cash ratio
4. Inventory turnover period
5. Receivables turnover period
6. Payables turnover period
7. Working capital cycle
8. Fixed asset turnover ratio
9. Sales to working capital
10. Total asset turnover ratio
11. Debt-to-equity ratio

2. Analyze the company performance over the period based on the findings above (P 4.2, M3, D1)

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