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Mba Plc Is An Investment Organisation Accounting Essay

Time Constrained Assignment

As part of the formal assessment for the Master of Business Administration you are required to submit a Financial Management assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

This is a time constrained assignment. It will be issued at 12.00 BST on 25th July 2008 and must be returned electronically by 12.00 BST on 26th July 2008.

You should answer all the questions. The marks allocated to each are shown after the question.

The two computational questions must be delivered on a spreadsheet. It must be possible for the marker to see clearly how any values you have included have been calculated. You should not therefore work out values manually and then input the answer into the spreadsheet.

Each question will be marked separately but for your guidance the following criteria will be used by the markers.

Below 30%

Your work will contain serious flaws which show that you have not understood key principles.

30-39%

Although you will have shown some awareness of the key issues you will not have demonstrated a sufficient understanding or application to justify a pass mark. There are significant errors in your calculations and you have not shown an understanding of relevant theory or applied it adequately .

40-49%

You will have shown a basic understanding of the theoretical issues. You will have demonstrated an understanding of the key issues in the question and made some attempt to apply theory to them to reach a conclusion. Your calculations will contain some errors or omissions but fundamentally you will have demonstrated an understanding of the underlying principles.

50-59%

You will have shown a good understanding of the key principles and been able to apply these to the problems set. You will have provided a conclusion and recommendations where required which is soundly based. Your calculations will contain some errors or omissions but these will be relatively minor.

60-69%

You will have demonstrated that you have a critical understanding of the key principles. You will have provided reasoned conclusions which are likely to include different options. Any computational errors will be minor.

70% and above

Your explanation of key principles will draw on a wide range of sources and indicate a critical understanding. Your conclusions will be soundly based and will include different options. Any computational errors will be minor.

Question 1

Green is planning to start a new retail business from 1 January 2009. The business will be a small private company and will be called Green Ltd.

At the start of trading, the business will have been incorporated and share capital of £12,000 would have been issued at par and paid for by Green. The business will commence with £2,000 in cash, £2,000 of stock and a 2nd hand van worth £8,000.

A business plan has been prepared by Green which indicates the following:

Sales are budgeted to be £3,000 per month January 2009 – March, £4,000 per month April – June, £5,000 per month July – September and £6,000 per month October to December 2009.

Green expects to earn a gross profit margin of 40% throughout the period and plans to maintain the £2,000 level of stock throughout the year. Each month, therefore, Green will purchase sufficient goods for resale to cover that month’s sales.

10% of the sales are budgeted to be cash sales and 90% credit sales each month. Credit customers (debtors) will be given two months to pay. Hence credit sales made, for example, in January 2009 would be received by Green Ltd during March 2009

All purchases of goods for resale will be on a credit basis and suppliers (creditors) will give one month of credit. Hence credit purchases made, for example, in January 2009 would be settled by Green Ltd during February 2009

Rent of £1,200 would be payable for the year, this being paid at £100 per month throughout the year. Business rates of £1,000 will be settled £500 in April and £500 in October 2009.

Heat, Light and Cleaning costs of £720 for the year are to be paid at the rate of £60 per month throughout the year. Assume that these amounts payable will be sufficient to cover the full costs for the year and that no year end accruals would therefore be required.

Administrative costs for the year, £960, are to be paid at the rate of £70 per month for the first 6 months and £90 per month for the final 6 months. Assume that these amounts payable will be sufficient to cover the full costs for the year and that no year end accruals would therefore be required.

Vehicle running costs £1,200, are to be paid at the rate of £100 per month throughout the year. Assume that there are no year end accruals or prepayments of expenditure required.

Green is to take a director’s salary (£11,400 for the year) and you should assume that this cost, which includes National Insurance Contributions, will be paid £500 per month January 2009 – March, £800 per month April – June, £1,000 per month July – September and £1,500 per month October to December 2009.

The vehicle used for the business will have a useful life of four years with no estimated resale value. Green intends to depreciate the vehicle on a straight line basis.

The corporation tax liability for the year is estimated to be £600 and Green plans to settle this at £150 per quarter, in March, June, September and December 2009.

Green anticipates paying a dividend of £1,000 in December 2009.

1. Using an accounting spreadsheet, you are required to produce for the business:

A Monthly cash budget January to December 2009 which clearly shows the amounts of cash in hand at the end of each month (17 marks)

A Budgeted Profit and loss account for the year to 31 December 2009 (7 marks)

A Budgeted Balance sheet as at 31 December 2009 (6 marks)

2. How would you describe the profitability and solvency of the business as revealed by the budgeted statements? How might any potential cash flow issues be addressed by Green?

(5 marks)

(35 marks in total)

Question 2

MBA plc is an investment organisation which is considering 2 potential new investments. These are mutually exclusive options in that the acceptance of any one investment would prevent investment in the other.

The organisation uses a net present value (NPV) approach to such decisions and uses its weighted average cost of capital (WACC) as the discount factor within the model.

Currently MBA plc has 100,000 x £1 Ordinary shares and £200,000 of debt. The Ordinary Shareholders expect a yield of 18% and the after-tax cost of debt is 12%.

Details of the two investments are as follows:

Investment A has an immediate cash outflow of £33,000 and this would be followed by cash inflows of £20,000 at the end of year 1, £20,000 at the end of year 2, £11,000 at the end of year 3 and £11,000 at the end of year 4.

Investment B requires an immediate cash outflow of £30,000 and would be followed by cash inflows of £12,000 at the end of year 1, £10,000 at the end of year 2, £20,000 at the end of year 3 and £20,000 at the end of year 4.

Assume, for purposes of this case, that the annual cash inflows equate to taxable profits before capital allowances.

For both investments, the initial outflows attract a first year taxation capital allowance of 35% based on the initial investment amount, followed by writing down allowances of 35% of the tax written down value for years 2 and 3. Each investment will be disposed of at the end of year 4 with a nil residual value. The capital allowance to be claimed in year 4 for both investments will therefore be a balancing allowance which will reduce the taxation written down value to zero.

[For example if the initial investment had been £100,000, then capital allowances to be claimed would have been £35,000 in year 1, £22,750 for year 2, £14,788 for year 3 (tax written down value at this point = £100,000 - £72,538 = £27,462) and a balancing allowance of £27,462.]

The capital allowance is available for offset against taxable profits in each year.

MBA plc pays corporation tax at the rate of 25% of its taxable profits after allowing for capital allowances. Assume that taxation in respect of year one profits is paid at the end of year two.

[So, for example if a project has taxable profits (before capital allowances) of, say, £40,000 in year 1 and if the company claims a capital allowance of £35,000, it would be charged corporation tax of 25% x (£40,000 - £35,000) = £1,250 for that year. The £1,250 tax would be paid in year 2.]

(a) Using an accounting spreadsheet, calculate the net present values of each of the proposed investments and recommend which of the two, if any, should be selected

(25 marks)

(b) Assume that immediately before making the above decision, MBA plc had the opportunity to raise a further £300,000 of long term debt at the same rate as the existing debt. Assume that the amount of Equity capital and its required return would not change. How would the change in capital structure impact on the above decision? (In order to answer this section you should copy your original spreadsheet to a new spreadsheet page and reformulate it as a new model.) What other factors might MBA plc consider before taking on the extra debt?

(5 marks)

(30 marks in total)

Question 3

(a) The analysis of the working capital operating cycle is fundamentally important in assessing the performance of a business. Why do you think this is so?

As part of your answer you should identify and discuss in a critical manner the key elements and operation of the working capital operating cycle and identify any ratio calculations which might assist with identification of potential difficulties within the cycle.

(10 marks)

(b) Explain, giving clear examples, how the working capital operating cycle of a large manufacturing concern might differ from that of a Supermarket operation.

(5 marks)

(15 marks in total)

Question 4

A mature, UK based manufacturing company serves a number of geographical markets in different parts of the world. It also buys some of its raw material inputs and services from overseas. It also owns and operates a number of distribution centres world wide. The company is quoted on the UK stock exchange but part of its capital structure includes debt instruments which are denominated in overseas currency. Some of this debt is at a fixed rate of interest, but the majority of it is at a flexible rate.

In what ways to you think that the operations of this plc are impacted upon by its international exposure? (15 marks)

What risk management techniques would you expect the company to be using in respect of any potential international exposure? (5 marks)

(20 marks in total)

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