Analytic Electronics has grown from a company with a £10 million turnover to a £201 million turnover and £18m profit in the last ten years. The existing owners have put

Financial Analysis (FINA)

TITLE OF ASSESSMENT:                              Assessment 2 (First sit): Coursework LEVEL:     H7

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

DEADLINE DATE FOR

SUBMISSION BY STUDENT:                  9^th May 2023 (Tuesday) by 14:00 (UK time) MARKS:           60%

SUBMISSION LOCATION:                       Online (via Mybeckett)

EXAMINER(S):                                           Dr Anup Chowdhury, Dr Peter Djabang, Bijoy Das, Kamrul Hassan and Mamoon Abdullah

Notes for candidates:

Hand in via MyBeckett as an MS word document via Turnitin (till 14:00 UK time) on 9^th May 2023 (Tuesday).

For the 2022/23 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 will be permitted to 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 2023/24.  Please note that both a 10-day extension  or mitigation  request must be accompanied by appropriate documentary evidence, for example a doctor’s letter and will be reviewed. Further information on the flexible assessment submission  policy and  mitigation  in  general  can  be found here.

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

Introduction

Put yourself in the following situation as a Financial Services Team of Analytic Electronics member.

You have been requested to provide meaningful financial analysis and information for decision- making concerning financing, performance, capital investment, constrain in production, budgeting and variance analysis. Accordingly, you are required to write a report (3,000 words) providing information about these areas.

You must submit the report online via the Turnitin link by 14:00 (UK time) on 9^th May 2023 (Tuesday). 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. Do not forget to mention your assumptions and the limitations of your analysis.

Financial analysis related to Investment Strategy:

1. Analytic Electronics has grown from a company with a £10 million turnover to a £201 million turnover and £18m profit in the last ten years. The existing owners have put all their financial resources into the firm to enable it to grow. The directors wish to take advantage of a fascinating market opportunity after Brexit and COVID-19 but would need to find £50 million of new equity capital as the balance sheet is already over-geared (i.e. has high debt). The options are discussed relatively uniformly, including flotation on the Main Market of the London Stock Exchange (LSE), flotation on the Alternative Investment Market (AIM), and private equity (PE). Write a report to enlighten the board on the merits and disadvantages of these three possibilities.                                                              (10 Marks)

• Ms Nichola, the Investment Manager, has requested some analysis concerning a proposed 5- year investment. The company plans to open a showroom in Leeds and has narrowed its selection down to two locations: (1) Thorpe park and (2) Beeston. You have to evaluate these options based on the following information. Analytic will lease the showroom initially for five years, and the total initial investment cost is estimated to be £20 million each.

Option one: Thorpe Park

It is expected that the Thorpe Park showroom will increase the overall sales revenue of the company by 11% per annum from 2023, and the variable cost will be forty percent of sales revenue. The fixed overhead cost for the initial three years will be £3,500,000, £2,000,000 and

£1,500,000, and zero afterwards. The promotion cost will be £500,000 in the first two years and £200,000 for the next three years. All other operating expenses will be 10% of the total contribution margin. The company will need a working capital investment of £5 million in year two, 80% of which will recover at the end of the project’s life. The company follows a straight- line depreciation method and expects to sell the assets at 10% of historical cost in year 5.

Option two: Beeston

On the other hand, if the showroom is opened at Beeston, then it will require fixed overhead costs for four years £2,500,000 in year one, £2,800,000 in year three, £2,100,000 in year four and £2,100,000 in year five. All other operating costs will be 10% per year of the contribution margin. The working capital investment will be £5,500,000 in year three, and 75% will recover in the last year. The sales revenue will increase by 12% per annum, and variable cost will be 47%. The company will follow a similar depreciation and promotional cost strategy as the Thorpe Park showroom.

Financing the investment

The company has several choices for financing this expansion – issuing new equity or bond or using existing retained earnings. The shares of Analytic are traded in the Alternative Investment Markets (AIM) for £3.5. However, the face value is £1.0, and last year’s dividend was £0.35. HSBC will charge a flotation cost of 9% to issue the new common share in the market. There is a projection that the dividend will grow 5% yearly in the coming years. In addition, the firm can issue an additional long-term bond at an interest rate (before tax) of 8% (i.e., Coupon rate). Similar bonds are selling at £105 in the market, slightly over the face value (£100), with five years of maturity. The market risk premium is 6%, the 3-month UK gilt rate is 4.5% (risk-free rate), and the average Beta of the Electronic goods industry is 1.53.

The company is also planning to issue preferred stocks. The industry average preferred dividend and current market price are £10 and £96, respectively. The company wants to maintain a

capital structure of approximately 40% debt, 10% preferred equity and 50% ordinary shares. The current corporate tax rate is 35%.

Required

1. Determine the Weighted Average Cost of Capital (WACC) for the target capital structure.
2. Evaluate the showrooms and comment on which one should be selected (Hints: use NPV and IRR). Ms Nichola prefers to use CAPM (i.e., Capital Asset Pricing Model) over DDM (i.e., Dividend Discount Model).
3. Advise accordingly with appropriate assumptions and rationales for the future.

(5+10+5 = 20 MARKS)

[Following profit statement is provided for your reference to calculate the net cash benefit by your investment manager Ms Nichola]

Financial Analysis for internal management:

The management accounting team of Analytic Electronics has also come up with some questions and requests you to explain/answer them for the upcoming board meeting:

1    What is the point of distinguishing absorption and marginal costing? Why do they report different profits? Explain with an example.        (5 Marks)

• The management of A&E, a subsidiary of Analytic, is concerned about its inability to obtain enough trained labour to enable it to meet its current budgeted projection:

The available labour cost to spend is £24,000. All the labours are paid at the same hourly rate across the services. You are requested to prepare a plan to produce a higher profit, ensuring that at least 50 per cent of the budgeted sales revenues can be achieved for each service. The fixed cost is £30,000.

PREPARE THE STATEMENT, WITH EXPLANATIONS, SHOWING THE HIGHEST PROFIT COULD BE ACHIEVED FROM THE LIMITED AMOUNT OF SKILLED LABOUR AVAILABLE WITHIN THE CONSTRAINT STATED.    (10 MARKS)

What steps could the business take to improve profitability considering the labour shortage?            (5 Marks)

• A&E makes Product G, the standard costs of which are:

The budgeted output for February 2023 was 1,000 units; however, the actual production was 1,100 units sold for £48,400. There were no inventories at the start or end of February.

The actual production costs were:

CALCULATE THE VARIANCE FOR MARCH FROM THE AVAILABLE INFORMATION AND USE THEM TO RECONCILE THE BUDGETED AND ACTUAL PROFIT FIGURES.                                                                                                               (8 MARKS)

How will a flexible budget help this company identify the budget variance?       (2 Marks)

Thank you, and best of luck.

Feedback: