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 available 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.
Your assignment should include: a title page containing your student number, the module name, the submission deadline and a word count; the appendices if relevant; and a reference list in Arden University (AU) Harvard format. 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 note that exceeding the word count will result in a reduction in grade proportionate to the number of words used in excess of the permitted limit.
Assignment Task: 1. a) It is said that most conceptual accounting frameworks start by asking the question as to who are the users of financial statements. Discuss the above statement by exploring the requirements of four interested parties in financial statements.
b) Some critics have argued against the ‘user need' approach to developing conceptual accounting frameworks. Discuss this statement exploring the criticism levelled at the stakeholder model as the basis for accounting frameworks.
2. The directors of LazerCore plc are considering two mutually exclusive investment projects. Both projects involve the purchase of new equipment. It is expected that there will be no residual value at the end of the life of the projects. The following data are available for each project.
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Project A
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Project B
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£000
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£000
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Costs (in year zero)
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270
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120
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Expected annual operating profit/loss:
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Year 1
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58
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35
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Year 2
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(2)
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(6)
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Year 3
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18
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10
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In its capital appraisal methods, the accountant uses cash flows rather than accounting profit. To convert operating profit to cash flows you are told that the company uses the straight-line method of depreciation for all non-current (fixed assets) when calculating operating profit.
The company uses the weighted average cost of capital (WACC) as the discount factor in net present value calculations. At present equity constitutes half of the capital structure of the company, with the remainder made up of debt financing. Equity investors require a 9% return and debt financers require 7% interest. There is also an associated risk premium of 2.0% which needs to be considered with these projects.
For each project you are required to:
a) Convert operating profit to cash flows
b) Calculate the payback period.
c) Calculate the weighted average cost of capital (WACC).
d) Calculate the net present value (NPV) using the WACC calculated in (b) above as the discount rate.
e) Provide an overall appraisal of both projects making a recommendation as to which one should be considered.
3. a) Consider the following information, for last year, concerning two different businesses operating in the same industry:
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Sabor plc
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Verra plc
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£m
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£m
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Operating Profit
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40
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30
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Long-term Capital Employed
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200
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150
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Sales Revenue
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400
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600
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i) You are required to identify and calculate three profitability ratios for both companies, using the information provided above.
ii) Analyse your ratios, calculated to part (i) above, and discuss the implications of your findings.
b) The following are extracts from the financial statements of GreenStar plc for 31 December 2016 and 2017.
GreenStar plc Statement of Financial Position (extract)
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2016
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2017
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£m
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£m
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Total Assets
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1,054
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1,266
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Equity and Liabilities
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|
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Equity
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563
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534
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Non-current liabilities
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200
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300
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Current liabilities
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291
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432
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Total equity and liabilities
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1,054
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1,266
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GreenStar plc Income Statement (extract)
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2016
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2017
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£m
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£m
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Operating profit
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243
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47
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Interest payable
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(18)
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(32)
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Profit before tax
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225
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15
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Tax
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(60)
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(4)
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Profit available
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165
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11
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You are required to:
i) Calculate the Gearing ratio, Interest cover and Return on Shareholder Funds (ROSF) for the years 2016 and 2017.
ii) Analyse your ratios to part (i) above and discuss the implications of your findings.
iii) Give brief reasons as to whether an investor might invest in the above company if the economy was about to go through a period of economic prosperity.
4. a) The relevant information from the financial statements of Astor plc for last year is as follows:
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£m
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Profit before taxation (after interest)
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330
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Depreciation charged against operating profit
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82
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Interest expenses
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42
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At the beginning of the year
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|
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Inventories
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44
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Trade receivables
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36
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Trade payables
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30
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At the end of the year
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|
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Inventories
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46
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Trade receivables
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42
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Trade payables
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34
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The following information is available about payments made during the year:
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£m
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Taxation paid
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98
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Interest paid
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50
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Dividends paid
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56
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i) Using the information provided above you are required to produce the ‘Cash flows from Operating Activities' section of the Cash flow statement.
ii) Briefly explain how the profit before taxation (after interest) taken from the income statement differs from the final figure of net cash flow from operating activities, as it would appear in the cash flow statement.
b) Discuss the major criticisms levelled at traditional budgeting (cash flow forecasting).