7ACCN018W: Financial Analysis for Managers

7ACCN018W: Financial Analysis for Managers 

Module Title: Financial Analysis for Managers
Module Code: 7ACCN018W
Module Status: Core

NOTE: Kindly share your UPDATED exam paper to the LIVE EXPERT with an updated Case Study (if any)

Feedback Method:
Mixture of Formative and Summative Assessment Feedback. Students receive comments on their ability to link theory into practice in terms of applying and interpreting “financial ratio analysis” to selected companies.

Assignment Outline:
This ‘Authentic Assignment’ contributes to 60% of the overall mark for the module. The assignment will be undertaken on an individual basis.
All your Excel calculations/sheets MUST be copied and pasted into one single MS Word document which will contain your answers to ALL the requirements of this assessment.
Please start your answer to each requirement on a new page. So, a new page for requirement (a), a new page for requirement (b), and so on.

Scenario
John Harrison who is 61, was recently made redundant from the company where he worked as a sales manager for several years. He is now planning to start a sandwich business from 1^st January 2023 with the intention of selling it as a going concern in four years’ time when he intends to retire in sunny Spain.
The financing for this business comes in part with the £42,000 redundancy pay that he received from the company. Any additional finance needed for this business could be obtained by way of an agreed bank loan. Barclays bank has agreed in principle to provide John with a £20,000 four-year 7.9% interest only loan where the loan capital will have to be repaid in full at the end of the four-year period.
John’s sister, Tracy, has shown an interest in John’s idea of setting up a sandwich business, and can invest £20,000 so that John need not take out the bank loan if John decides to involve her in the business.
John is unsure as to whether the business should be in the form of a partnership or a limited company.

• A market survey carried out last month indicated that the business would have a good chance of success with the following forecast:

Average sales in the first year based on the business operating seven days a week are likely to be:
i. £185,000 with a probability of 23%
ii. £212,000 with a probability of 48%
iii. £248,000 with a probability of 29%

1. The average gross profit margin is estimated to be 55% throughout the four year period.
2. The demand however is not constant throughout the year. It is estimated that in each of the four-year period, 25% of annual sales will be in the first quarter, 30% in the second quarter, 35% in the third quarter and 10% in the final quarter of the year. (you may assume that in each quarter, sales per month stays the same).
3. Sales are expected to increase by 12% in year 2, 16.5% in year 3, and 8% in year 4. The research company is unable to forecast sales beyond year 4.
4. Two third of sales will be to individual customer for cash and the rest will be to corporate clients on one-month credit
5. Suppliers of raw material for making the sandwiches are paid in the month following the purchase. Material costs are expected to increase by 3.6% per year in year two, year three, and year four.
6. Fixed operating costs of the business including staff salaries are estimated at £27,300 in the first year increasing by 4.8% per year in each of the following three years. Fixed costs occur evenly throughout the year, and are paid for on a monthly basis.
7. Suitable premises will be rented at £38,400 per year with the rent payable quarterly in advance. This means the rent for the first quarter is paid on 1^st January 2023. The annual rent is expected to increase by 7% per year in each of the following 3 years.
8. Equipment costing £36,000 will need to be purchased in January and are paid for immediately. The equipment is expected to have no salvage value at the end of the 4th year.
9. The business will need £19,000 of working capital at the start of the business. You may assume that the investment in working capital will be recovered in full at the end of year 4.

Required: (Please start your answer to each requirement on a separate page)

a) Discuss the advantages and disadvantages of setting up the business as:
i. A partnership
ii. A private limited company
(15 marks) (Word limit 450 words +/- 10%)

b)

i. Produce a cash budget for the first year of the business. Assume John ultimately decides to work as a sole trader and borrows £20,000 from Barclays bank at 7.9% on an interest-only basis, and with the loan capital to be repaid in full at the end of the four-year period. (20 marks)
ii. Suggest, in general terms, five methods by which a business can deal with short-term cash flow problems. (5 marks) (Word limit 150 words +/- 10%) 

c) Briefly discuss the functions of budgets in organisations, and the difficulties that start-up businesses face when attempting to draw up budgets. (10 marks) (Word limit 300 words +/- 10%)

d) Calculate the following for the first year of the business:
i. Budgeted profit for the year
ii. BEP
iii. Margin of safety (10 marks) 

e) Assuming this is a four-year project, and ignoring all taxation implications, calculate the following: (Discount rate at 10%)
i. The Net Present Value (NPV)
ii. The Internal Rate of Return (IRR) – Use Excel function
iii. The Payback Period (25 marks) 

f) Discuss the advantages and limitations of each of the following project appraisal methods:
i. Payback
ii. Accounting Rate of Return (ARR)
iii. Net Present Value (NPV) (15 marks) (Word limit 450 words +/- 10%)

(Total: 100 marks)

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