Assessment 2_Individual

2024/25 SEMESTER [2]

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MODULE TITLE: Financial Analysis (FINA)

TITLE OF ASSESSMENT: Assessment 2: Coursework

First-sit – Individual

LEVEL: H7

COURSE(S): MBA (Full Time), MBA (Executive)

DEADLINE DATE FOR

SUBMISSION BY STUDENT: First sit – 6^th May 2025, by 3:00 pm (UK)

MARKS: 60%

SUBMISSION LOCATION: Online (via Mybeckett)

EXAMINER(S): Dr Peter Djabang and Dr Anup Chowdhury ___________________________________________________________________ Notes for candidates:

This is an individual assessment that students should hand in via MyBeckett as an MS Word document via Turnitin (till 15:00 pm UK time) on 6^th May 2025 (First sit).

For the 2024/25 academic year, the Business School is piloting a new process for assignment extensions. For students requiring 5-day extensions, you do not have to apply for this. Instead, you can submit up to 5 working days after the deadline without incurring a late penalty. This will be called the flexible submission period. Full details of this policy can be found here.

If you require more time beyond the additional 5 working days flexible submission period, you can apply here for an additional 5 working days (making 10 working days from the original deadline) or apply for Mitigation to request to defer your assessment to the next module assessment period in 2024/25. Please note that a 10-day extension or mitigation request must be accompanied by appropriate documentary evidence, such as a doctor’s letter, and will be reviewed. Further information on the flexible assessment submission policy and general mitigation can be found here.

Your report will be assessed as a whole in the following areas:

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• Coverage of theoretical underpinnings involved

• Demonstration of a critical understanding of the theoretical aspects involved • Practical application of the theoretical aspects of the case study • Application of mathematical knowledge

• Evidence of additional and relevant research

• Coherence and quality of the report

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Introduction

Consider yourself a newly joined member of A&Z Plc’s Financial Services Team. This is a UK conglomerate owns companies in different industries, such as manufacturing, consumer goods, leisure, etc. You have been requested to provide meaningful financial analysis and information for decision-making concerning financing, performance, capital investment, pricing strategies, and marginal and absorption costing. Accordingly, you must write a report (4,000 words) about these areas.

You must submit the report online via the Turnitin link by 15:00 pm (UK time) on 6^th May 2025 (first sit).

Please use the Harvard referencing where relevant; do not use lecture slides or any Pedia (such as Wikipedia or Investopedia) as references. You should report your calculations and supplementary information in the Appendix. Don’t forget to mention your assumptions and the limitations of your analysis.

Financial analysis related to Investment Strategy:

Because of the climate change target of the UK (the road to net-zero targets), the company’s newly appointed investment manager, Ms Sandara, came up with a new investment strategy – closing five of the company’s existing brands and focusing more on the company’s most popular electronic vehicle brand in the UK. According to her assessment, this closing decision will generate around £100 million in free cash flow, which the company could reinvest to expand its popular brand – ‘iDriveX’. Sandara suggests that the market survey indicates this is one of the most popular brands in England, and demand is increasing. The year-to-year sales of the ‘iDriveX’ brand have increased by 45% (7,500 units in 2024 compared to 2023), which was higher than all of those five brands combined.

Moreover, she indicated that the expansion decision would reduce overall costs while improving quality. This cost-quality dynamic will help the company face competition and achieve a larger market share. However, this expansion will cost the company £450 million, which requires rigorous strategic assessment, including financial viability. She has approached you to evaluate this possible restructuring decision and whether it is a financially viable strategy. She also suggested that this expansion project will run for the next five years, and after that, the company will enter into a new strategic cycle.

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You have collected the following information from her to do the financial analysis for meaningful decisions.

The expansion is expected to increase the sales of ‘iDriveX’ by the following units. 12,000 units in 2025; 14,000 units in 2026; 16,500 units in 2027; 18,000 units in 2028; and 20,000 units in 2029.

In 2024, the market price of this brand was £52,000, but the company wants to reduce it by £2,000 in 2025 and then will increase/decrease with the pace of the economy and the purchasing power of the consumers. The KPMG has projected that the Bank of England’s base rate will remain around 4 per cent for the next couple of years, targeting the inflationary pressure. In line with this economic assessment, your company has decided not to increase the price for the next years (i.e., year 2026), but from the second year (i.e., from 2027), a contingency plan is in place to increase the unit price by £1,000.

The production cost is £28,000 per unit, which will increase in the line of inflation and other materials cost over the project’s life at 15% each year starting from year two. The production involves fixed overhead expenditure of £30 million in 2025 and 2026, £25 million in 2027 and £20 million in 2028 and 2029. The project requires a working capital investment of £5,000,000 at the beginning, 50 per cent of which the company will recover at the end of the project’s life. The cost of promotion and R&D, respectively, will be £12 million each year. Assume that there is no other cost involved in this investment. The company is currently following the straight-line depreciation method, and historically, 15% of the cost price of such investment is recovered in the final year.

Choice of Financing: (the Board of Directors have agreed)

The Board of Directors disapproved reinvesting the £100 million free cash flow from closing five existing brands into this project. Instead, they want to reserve this fund for future uncertainty/business disruption. For this expansion project recommended by Ms Sandara, the Board has recommended raising capital from alternative financing from external sources.

The company has three choices for financing this expansion: issuing new equity, issuing a bond, and issuing preference shares.

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A&E Plc’s equity is trading on the London Stock Exchange (LSE) with a face value of 200 pence. The market price of each share is as follows: 350p in April 2022, 420p in December 2023, 555p in July 2024, 650p in December 2024, and 620p to date.

In the last fiscal year, the company had declared a 70p per share dividend (DPS). The company’s investment banker, KPMG, always charges an issuing (i.e. flotation) cost of 3% on the face value to issue new common stock in the market. Historically, the company’s earnings per share were 72p in 2020, 65p in 2021, 80p in 2022, 78p in 2023, and 82p in 2023.

The company has also assessed the possibility of issuing a bond in the market. Currently, bonds of similar companies are selling at £110, slightly higher than their face value (i.e. £100), with a coupon rate of 4.20% and a maturity of 5 years.

The company’s third financing option is to issue preferred stock in the LSE. The industry average preferred dividend and the current market price of preference shares of similar companies are £7 and £105, respectively.

You have also collected additional data on the UK financial market and the company. The 3-month UK Gilt yield is 4.57%, the FTSE 100 index has an average yearly return of 14%, and the average corporate tax rate in the UK is 20%. In addition, A&Z Plc’s beta is 1.2, which is slightly higher than the market beta of 1.

For this new investment, the company wants to maintain its existing capital structure policy of 40% debt, 10% preferred equity and 50% common equity.

Ms Sandra has requested that you write a report based on the following queries so she can present it at the next board meeting.

(a) What will be the cost for each source of financing? Consider the DDM (i.e., Dividend Discount Model) and CAPM (i.e., Capital Asset Pricing Model) methods for common equity. Please provide your comments on each approach’s assumptions, merits, and limitations.

(b) Determine the optimum cost of capital using the Weighted Average Cost of Capital (WACC) approach for the target capital structure. (Hints: Ms Madison would prefer to use CAPM over DDM).

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(c) Evaluate this possible restructuring decision’s total value addition (i.e., total NPV) and breakeven rate (i.e., IRR). (Hints: Use the WACC as your discount rate to evaluate the investment projects)

(d) Assume that the product lifecycle of five years is considered a safe bet, but the scale of demand for the product is highly uncertain, mainly due to possible Trade-war and Energy Crisis. Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.

(e) Explain how Artificial Intelligence (AI) could help manage financial resources, particularly capital investment decisions.

(5+5+10+5+5 =Total 30 marks)

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Financial Analysis for Internal Management:

The management accounting team of A&Z Plc also came up with some questions and requested you to explain/answer them for the upcoming board meeting:

1. A chain of A&Z Plc, Sonic Toy Ltd is a wholesale Toys manufacturer. Because of a series of machine-related accidents at one of its factories, working practices have been revised and altered. This has resulted in a reduction in the number of labour hours available in the next period to 500,000. Four toy robots are produced in this factory, and estimated data for the next accounting period are as follows:

Product S1 S2 S3 S4 Maximum demand (units) 60,000 40,000 55,000 50,000

Selling and costing information (per unit) £ £ £ £

Selling price 100 105 90 130 Direct materials 20 30 25 30 Direct labours (Labour rate = £12/hr) 48 36 24 60 Variable overhead 10 12 9 15 Selling overhead 7 7 7 7

The team wants to know about the limiting factor and requested that you help calculate the maximum profit achieved in the period. The production involves a fixed cost of £2,000,000.

They also asked to provide at least two alternatives Sonic Toy Ltd has to overcome the limiting factor.

2. Another chain, Leisure Sports Club, is opening an exquisite new gym with a luxury spa within the city centre of Leeds as part of its growth strategy, but it needs to attract new members to ensure it survives. Over the last few years, demand for sports facilities has been rising as more and more consumers become health conscious, resulting in a significant increase in the number of sports clubs within the city of Leeds. Leisure Club has to develop the right pricing strategy to attract and retain customers and achieve their financial objectives.

The budgeted fixed costs (for the rental of the building and sports equipment) for the first year are £25,000, and they are expected to be 50% of the total overheads at breakeven. The managers estimate that each member will use about £280 in resources over a year. In addition, each club member will be charged a £480 annual membership fee.

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The management accounting team has the following questions for you:

a. How many members will the club need to have to break even?

b. Calculate the margin of safety percentage if Leisure could attract 300 or 400 members. c. If Leisure wishes to profit £20,000, how many members should it target?

d. The managers decide that a £480 fee is too high. What would happen if they reduced the membership fee to £400? Adjust and recalculate the contribution, breakeven point, margin of safety percentage and target profit output levels stated in and advise management of the feasibility of a price reduction.

e. Explain the limitations of Cost Volume Profit (CVP) analysis.

3. Budget planning is an essential organisational process with many advantages. However, there can be negative aspects to the budgeting process. The management accounting team of A&Z Plc wants you to discuss and provide examples of these budgeting aspects.

(10+15+5=Total 30 Marks)

Thank you, and best of luck.

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ASSESSMENT CRITERIA (Assessment Two)

You should use a report format with a clear introduction and appropriate business language. Marks will be awarded for good supporting evidence from academic sources or examples. Marks will be awarded for clear conclusions drawn from the preceding analyses. More specific illustrative assessment criteria are set out below:

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