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2021/22 SEMESTER [2]
MODULE TITLE: Financial Analysis (FINA)
TITLE OF ASSESSMENT: Assessment 2 (Resit): Coursework
LEVEL: H7
COURSE(S): MBA (Full Time), MBA (Executive)
DEADLINE DATE FOR
SUBMISSION BY STUDENT: Monday 25th July 2022 by 3:00 pm (UK)
MARKS: 60%
SUBMISSION LOCATION: Online (via Mybeckett)
EXAMINER(S): Lillian Lee, 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 25th July 2022 (Monday).
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Your report will be assessed as a whole in the following areas:
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
Put yourself in the following situation as a member of the Financial Services Team of XYZ plc,
which is a UK conglomerate. It owns companies across different industries, such as – car
manufacturing, consumer goods, leisure etc.
You have been requested to provide meaningful financial analysis and information for decision
making concerning financing, performance, capital investment, constrain in production,
budgeting, and sensitivity analysis. Accordingly, you are required to write a report (3,000 words in
total) providing information about these areas.
You must submit the report online via the Turnitin link by 15:00 pm (UK time) on 25
th July
2022 (Monday). Please use the Harvard referencing where relevant, do not use lecture slides or
any Pedia (such as Wikipedia or Investopedia) as reference. You should report your calculations and
supplementary information in 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 target), the company’s newly
appointed investment manager Ms Madison came up with a new investment strategy – closing five
of the company’s existing brand 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 free cash flow, which the company could reinvest to expand its popular brand – ‘eXi
Drive’. Madison 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 ‘eXi Drive’ brand have gone
up by 25% (5,000 units in 2021 compared to 2020), which was higher than all of those five brands
together.
Moreover, she has indicated that the expansion decision will reduce the overall cost while
improving quality. This cost-quality dynamic will help the company face competition and achieve
a larger market share. However, this expansion will cost £150 million for the company, which
require rigorous strategic assessment, including financial viability. Now, she has approached you
to evaluate this possible restructuring decision, whether it is a financially viable strategy or not. She
also has 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 ‘eXi Drive’ by the following units.
8,000 units in 2022
8,000 units in 2023
10,000 units in 2024
11,000 units in 2025
12,000 units in 2026
In 2021 the market price of this brand was £45,000, but the company wants to reduce it by £5,000
in 2022 and then will increase/decrease with the pace of the economy and purchasing power of
the consumers. KPMG has projected that the Bank of England’s bank rate will remain 0.50 per
cent for the next couple of years, which will allow the post-Brexit-and-Covid expansion of the
economy. In line with this economic assessment, your company has decided not to increase the
price for the next three years (i.e., till 2024), but from the fourth year, a contingency plan is in place
to increase the unit price by £2,000.
The production cost is £20,000 per unit, which will increase in the line of inflation and other
materials cost over the project’s life at a rate of 10% each year starting from year two. The
production involves fixed overhead expenditure of £20 million in 2022 and 2023, £15 million in
2024 and £10 million in 2025 and 2026. The project requires a working capital investment of
£850,000 at the beginning, 50 per cent of which the company will recover at the end of project
life. The cost of promotion and R&D will be £5 million, respectively, over the five years. Assume
that there is no other cost involved in this investment. The company is currently following the
straight-line depreciation method, and historically 10% of the cost price of such investment is
recovered in the final year.
Financing choices: (the Board of Directors have agreed)
The Board of Directors disapproved reinvesting the £100 million free cash flow from closing the
existing five brands. Instead, they want to keep this fund reserve for future uncertainty. For this
expansion project recommended by Ms Madison, the Board has recommended raising capital from
alternatives financing from external sources.
The company has three choices for financing this expansion: issuing new equity, issuing a bond,
or issuing preference shares.
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The equity of XYZ plc is currently trading in London Stock Exchange (LSE) with a face value of
£10. The market price of each share is as follows:
Date Closing Price
04.11.20 £34.50
03.12.20 £36.20
06.01.21 £33.55
03.02.21 £35.10
To date £ 34.80
In the last fiscal year, the company had declared a £1.2 per share dividend (DPS). The company’s
investment banker KPMG always charges an issuing (i.e. flotation) cost of 20% on the face value
to issue new common stock in the market. Historically, the company’s earnings per share are as
follows:
Year EPS (Earning Per Share
2017 22p
2018 26p
2019 17p
2020 22p
2021 25p
The company has also assessed the possibility of issuing a bond in the market. Currently, bonds
of similar companies are selling at £110, slightly over the face value (i.e. £100) with a coupon rate
of 10% and 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 £10 and £108, respectively.
You have also collected additional data on the UK financial market and the company. Currently,
the yield of the 3-month UK Gilt is 3.0%, the FTSE 100 index has an average yearly return of
10%, and the average corporate tax rate in the UK is 30%. In addition, the beta of XYZ plc is 1.5,
which is slightly higher than the market beta of 1.
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The company wants to maintain its existing capital structure policy of 50% debt, 10% preferred
equity and 40% common equity for this new investment.
Ms Madison has requested you to make a report based on the following queries so that she can
present it at the next board meeting.
1. What will be the cost for each source of financing? Consider both DDM (i.e. Dividend
Discount Model) and CAPM (i.e. Capital Asset Pricing Model) method for common
equity. Please provide your comments on the assumptions of each approach and their
merits and limitations.
2. Determine the optimum cost of capital using the Weighted Average Cost of Capital
(WACC) approach for target capital structure. (Hints: Ms Madison would prefer to use CAPM
over DDM).
3. Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this
possible restructuring decision. (Hints: Use the WACC as your discount rate to evaluate the
investment projects)
4. Assume that the product lifecycle of five years is viewed as a safe bet, but the scale of
demand for the product is highly uncertain, mainly due to possible BREXIT and COVID19. Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.
5. Explain how the BREXIT could affect the UK automobile manufacturing sector and the
possible strategic changes required in this industry to cope with the risk?
(Total 30 marks)
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[Following profit statement is just for your reference to calculate the net cash benefit
given by your investment manager Ms Madison]
Income Statement
2017 2018 2019 2020 2021
£m £m £m £m £m
Sales 1,622 1,800 2,730 2,654 2,703
Cost of Sales (908) (1,056) (1,855) (1,897) (1,754)
Gross Profit (Loss) 714 744 875 757 949
Overheads
Fixed Overheads 120 156 165 154 146
Stock Upkeep Cost 0 1 0 17 31
Promotion 50 60 149 149 409
Research and Development 0 194 20 27 16
Market Research 15 15 15 15 15
Depreciation 68 80 78 72 65
(253) (506) (427) (433) (682)
Operating Profit (Loss) 461 238 448 323 267
Investment Disposal Income 0 8 11 0 0
Interest on Current Account 0 7 8 8 10
Interest on Loans (34) (45) (33) (11) (12)
(34) (30) (14) (3) (2)
Pre-Tax Profit (Loss) 427 208 434 320 265
Tax (85) (27) (126) (137) (78)
Post Tax Profit (Loss) 342 181 308 183 187
Cost of Dividends (20) (40) (36) (40) (28)
Year Retained Profit (Loss) 322 141 272 143 159
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Financial Analysis for internal management:
The management accounting team of XYZ plc also came up with some questions and requested
you to explain/answer them for the upcoming board meeting:
1. A chain of XYZ plc, BHealthy Ltd is a wholesale manufacturer of healthy foodstuffs.
Because of a series of machine-related accidents at one of its factories, working practices
have been revised and altered. It has resulted in a reduction in the number of labour hours
available next period to 60,000. Four ready-made meals are produced in this factory and
estimated data for the next accounting period are as follows:
Product S1 S2 S3 S4
Maximum Demand (units) 8,000 6,500 4,800 3,200
Selling and costing information (per unit)
£ £ £ £
Selling price 80 110 145 170
Direct materials 12 30 35 40
Direct labours (Labour rate = £5/hr) 16 20 15 20
Variable overhead 8 10 14 16
Selling overhead 4 4 4 4
The team wants to know about the limiting factor and requested you to help calculate the
maximum profit which can be achieved in the period?
They also asked to provide TWO alternatives BHealthy Ltd has to overcome the limiting
factor?
(10 marks)
2. Another chain, Phase3 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 make sure 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. Phase3 club has
to come up with the right pricing strategy to attract and retain customers to achieve their
financial objectives.
The budgeted fixed costs (for the rental of the building and sports equipment) for the first
month are £7,500, and they are expected to be 27.27% of the total overheads at breakeven.
The managers estimate that each member will use about £200 in resources over a year. In
addition, each club member will be charged a £275 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 Phase3 attracts 200 or 300 members in the
first month.
c. If Phase3 wishes to make a profit of £2,400, how many members should it target?
d. The managers decide that a £275 fee is too high. What would happen if they reduced
the membership fee to £245? Make the adjustment and recalculate the contribution,
breakeven point, and margin of safety percentages at output levels stated in b) and
advise management of the feasibility of a price reduction.
e. Explain the limitations of Cost Volume Profit (CVP) analysis.
(15marks)
3. Budget planning is an essential process for an organisation, with many advantages.
However, there can be negative aspects to the budgeting process. The management
accounting team of XYZ plc wants you to discuss and provide examples of both of these
aspects of budgeting.
(5 marks)
Thank you and best of luck.
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ASSESSMENT CRITERIA
Report format used, introduction clear and concise with appropriate business language.
Marks will be awarded for good supporting evidence of either 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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Assessment
Criteria
70%+ 60%+ 50%+ 40%+ <40%
Financial
analysis related
to Investment
Strategy
(indicative
weighting 50%)
(Total marks
30)
Correctly identify
all the costs of
capital and WACC.
Excellent
description of
merits and demerits
of each method.
Excellent analysis
of the investment
appraisal. Excellent
and well-supported
recommendations.
Insightful
understanding and
evaluation of the
NPV and IRR
techniques,
including their
limitations.
Excellent
evaluation of
sensitivity analysis.
Correctly identify
some of the costs
of capital and
WACC. A very
good description of
merits and demerits
of each method.
Very good analysis
of the investment
appraisal. Very
good and
supported
recommendations.
Very good
understanding and
evaluation of the
NPV and IRR
techniques,
including their
limitations. Very
good assessment of
sensitivity analysis.
Reasonably identify
the cost of capital
and WACC. A
reasonable
description of the
merits and demerits
of each method.
Reasonable analysis
of the investment
appraisal.
Reasonably
supported
recommendations.
Reasonable
understanding and
evaluation of the
NPV and IRR
techniques,
including their
limitations.
Reasonable
evaluation of
Limited analysis on
the cost of capital
and WACC.
Limited description
of merits and
demerits of each
method. Limited
analysis of the
investment
appraisal. Limited
supported
recommendations.
Limited
understanding and
evaluation of the
NPV and IRR
techniques,
including their
limitations. Limited
evaluation of
sensitivity analysis.
Limited discussion
Little or no analysis
on the cost of
capital and WACC.
Little or no
description of
merits and demerits
of each method.
Little or no analysis
of the investment
appraisal. Little or
no supported
recommendations.
Little or no
understanding and
evaluation of the
NPV and IRR
techniques,
including their
limitations. Little or
no evaluation of
sensitivity analysis.
Little or no
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Excellent
discussion on the
impact of BREXIT
on the UK market.
Very good
discussion on the
impact of BREXIT
on the UK market.
sensitivity analysis.
Reasonable
discussion on the
impact of BREXIT
on the UK market.
on the impact of
BREXIT on the
UK market.
discussion on the
impact of BREXIT
on the UK market.
Financial
analysis for
internal
management
(Indicative
weighting 50%)
(Total marks
30)
Thorough and
excellent
knowledge,
explanation, and
evaluation of the
limiting factors,
Excellent
identification of
alternatives to
overcome the
limiting factor.
Excellent
evaluation of
breakeven, the
margin of safety,
target profit. An
insightful
discussion of
limitations of CVP.
Excellent
Very good
knowledge,
explanation, and
evaluation of the
limiting factors,
very good
identification of
alternatives to
overcome the
limiting factor. Very
good evaluation of
breakeven, the
margin of safety,
target profit. Very
good discussion of
limitations of CVP.
Very good
underpinning from
Reasonable
knowledge,
explanation, and
evaluation of the
limiting factors,
reasonable
identification of
alternatives to
overcome the
limiting factor.
Reasonable
evaluation of
breakeven, the
margin of safety,
target profit.
Reasonable
discussion of
limitations of CVP.
Reasonable
underpinning from
Limited knowledge,
explanation, and
evaluation of the
limiting factors,
limited
identification of
alternatives to
overcome the
limiting factor.
Limited evaluation
of breakeven, the
margin of safety,
target profit.
Limited discussion
of limitations of
CVP. Limited
underpinning from
budgeting and its
examples.
Little knowledge,
explanation, and
evaluation of the
limiting factors,
little or no
identification of
alternatives to
overcome the
limiting factor.
Little or no
evaluation of
breakeven, the
margin of safety,
target profit. Little
or no discussion of
limitations of CVP.
Little or no
underpinning from
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underpinning from
budgeting and its
examples.
budgeting and its
examples.
budgeting and its
examples.
budgeting and its
examples.
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Feedback:
Date generic feedback will be
available:
Within four weeks of the assessment period, subject
to the date set for the release of results
Date provisional marks will be
available
Within four weeks of the assessment period, subject
to the date set for the release of results
How provisional marks will be
returned to you:
Posted on the module on MyBeckett.
Date individual feedback will
available
Following the Examination Committee and the
return of all scripts from the External Examiner
How individual feedback will be
returned to you:
By collection of assessments as directed by your
Admin Team
