ACC7032 Managerial Finance, Assignment, Birmingham City University, UK

Assessment Brief

2.1.  Scenario

QUESTION 1

The scenario

Comfort Group (CG) is a flagship name in UK warehousing and property investment spaces. CG’s warehouses serves most of UK’s supermarkets. CG’s property portfolio includes residential, retail and commercial properties including mixed use establishments and was founded on the principles of fairness, integrity and quality. CG is headed by Rosy Zhang its founder and Chief Executive Officer, a renowned businesswoman. CG also has a homebuilding division targeting affordable housing market. 

Owing to various macro-economic factors, the UK homebuilding market has an assortment of challenges: the after effects of the COVID-19 pandemic (Hasek, 2021), shockwaves from the Russia-Ukraine war (Neuman & Hurt, 2023), Brexit (Bill & Frank, 2022) etc and opportunities (Hasek, 2021). These and other issues require CG to adopt to enjoy sustainable competitiveness in the competitive market(s) it operates. To achieve this, CG’s Strategic Business Committee resolved to acquire a good fit and are seeking integration with existing brands either in the UK supermarket or UK property development & homebuilding industry. The Strategic Business Committee believes this acquisition will place CG in better stead for strategic competitiveness. 

The Strategic Business Committee has identified two possible acquisition targets and would want you to perform some ratio analysis, evaluate the findings and advise the committee on which one they should acquire and why. 

The target companies are below:

Habitable Spaces Ltd: A force in the property development and homebuilding industry. Habitable Spaces competes against Barrat Developments, Taylor Wimpey, Persimmon, Bellway and Vistry Group to name but a few. It is listed on UK’s London stock exchange with huge capital raising capacity. A myriad of challenges and opportunities characterise the building industry including labour shortages (Hasek, 2021).   

Provision Ltd: A no frills supermarket chain with roots in Germany but operates in major markets including USA and UK. Provision Ltd’s journey in the UK began with a single store four decades ago and now has a strong supply chain focusing on low cost, quality products. The layout in its supermarkets resembles simplicity and convenience and fosters numerous cost-saving initiatives in all it does including product displays, shop size and the checkout process. Over the past decades of serving the UK, Provision Ltd has and is still gaining market share. It overtook a number of traditional supermarkets.

The ratio analysis below is in 4 categories (Profitability, Liquidity, Management Efficiency, a

Required tasks

1.1.  You are required to calculate ratios for Provision Ltd. 

1.2.  Prepare a business report (using a proper report format) to Comfort Group’s Strategic Business Committee based on ratio analysis and relevant qualitative issues to be considered. 

You are required to critically evaluate the financial statements, making a convincing argument for investment in one of the two target companies. Please consider qualitative factors in your critical evaluation. 

You are also required to critically evaluate the working capital management (WCM) of both companies and draw conclusions on which is stronger. In conjunction with quantitative measures, provide some qualitative aspects (for example: Industry related characteristics) for a more comprehensive understanding of working capital management of the companies.

Financing decision is an important one for Comfort Group’s strategic Business Committee when considering the acquisition of either Habitable Spaces Ltd or Provision Ltd. 

Identify and critically evaluate three sources of finance that Comfort Group’s Strategic Business Committee should consider in the acquisition process of either Habitable Spaces Ltd or Provision Ltd. 

You should recommend one or two of the sources you deem best suited. Your explanation of possible sources of funding must be accompanied by a critical, well-reasoned, well-referenced conclusion and recommendation(s). 

1.3.   Your analysis, conclusions and recommendations should be supported by credible academic references (in Harvard Referencing format per Birmingham City University policy) using proper academic/ business English presented using an appropriate business format.

Question 2

You are a Junior Management Accountant at Horizon Holdings Plc. The Finance Director wants your calculations and recommendations regarding an expansion plan being considered by the Board is considering, which includes a chain of factory outlet stores.  
 
Company policy dictates that any decision should be based on the results of calculating Net Present Value (NPV) of 3 years of cash flows using a cost of capital of 11%, Payback Period (PBP) and discounted Payback Periods (DPBP) must be less than 3 years, and the Internal Rate of Return (IRR) of the project should provide a 7% cushion in case of increases in inflation or interest rates.  

Below are the figures for the first one that is planned for a central Leeds location next year. 

The investment consists of £120,000 for the land, building costs of £201,300, and £96,200 for fittings and equipment. 

The new Leeds location will produce products Alpha and Beta once commissioned. 

The cash flows in year 1 are expected to be: 
total sales revenue            £780,530
the cost of Alpha stock sold    £256,490
cost of Beta stock sold        £127,281
staff costs                £102,906
lighting & heating costs        £12,486
other overheads            £98,562.

All sales are cash sales and Horizon Holdings Plc will pay for all its costs and expenses each year. The cash flow patterns for years 2 and 3 are the same with those in year 1 however, they are expected to increase by 3% inflation each year. 

Required: 

2.1.    Using the information above and in accord with the above stated company policy you are required to calculate:a)    Net cash flows over the three years of the project  
b)    Net Present Value (NPV)  
c)    Payback period (PBP)
d)    Discounted Payback Period (DPBP)    

2.2.    Based on your calculations and other considerations, critically evaluate the proposed investment’s viability and recommend whether Horizon Holdings Plc should proceed with the investment. 
 
2.3. In addition to the investment appraisal techniques calculated in 2.1, recommend two alternative investment appraisal techniques Horizon Holdings Plc could use and justify why you think they are effective.    

QUESTION 3 

Flexi Sportswear Ltd manufactures and distributes sportswear & accessories and is a major supplier to Olympics participants. 

Below are three of the products Flexi Sportswear produces and are accessing their viability: 
1.    Golf ball
2.    Tennis ball 
3.    Foot ball 

Each ball must pass through a pressure testing machine and there is currently only one testing machine which cannot be replaced. For this reason, Flexi Sportswear Ltd cannot expand its operations unless a costly and time-consuming production process re-engineering project is done. The maximum available testing machine hours for Flexi Sportswear Ltd in 2024 is expected to be 3452 hours due to the ageing state of the testing machine.

Maximum market demand and testing hours requirements for each of these ball for year ending 31 December 2025 are shown below:

Budgeted data year ending 31 December 2025

Flexi Sportswear Ltd uses a pull production system in the quest to eliminate inventory holding costs.

Flexi Sportswear Ltd’s Sales Director, Judy Tyde has reported to the Planning Committee that she has already signed a once off 1,210 Tennis ball contract with Universe Players Club a new club started in 2024. This will be the first order to deliver to Universe Players Club by Flexi Sportswear Ltd. If this contract is not fulfilled, Flexi Sportswear Ltd would incur a financial penalty of £7,840. This order is not included in the Tennis ball maximum market demand figure. This implies Flexi Sportswear Ltd should prioritise fulfilment of the Tennis ball contract ahead of normal annual demand requirements. The agreed contract selling price per Tennis ball is the same as normal Tennis ball.

Flexi Sportswear Ltd’s directors need to know whether they should go ahead and satisfy (honour) the contract and then prioritise production in the normal way or whether they should consider breaching (dishonouring) the Universe Players Club Tennis ball contract.

You have been provided with the following actual results for years ended 31 December 2023 and 31 December 2024 below. 

Required:

3.1.  Considering the scenario above, rank these three sports ball variants (Golf ball, Tennis ball and Football) in the order in which they must be produced by Flexi Sportswear Ltd – Rank 1 being the one to be prioritised. Clearly show your workings.

3.2.  Prepare a Budgeted Production Schedule and a Marginal Costing Income Statement (analysed by product) the year ending 31 December 2025 assuming that the Tennis ball contract is honoured. [3 marks for the Production Plan, 5 marks for the Marginal Costing Income Statement] 

3.3.  Prepare a Budgeted Production Schedule and a Marginal Costing Income Statement (analysed by product) the year ending 31 December 2025 assuming that the Tennis ball contract is not honoured. [3 marks for the Production Plan, 5 marks for the Marginal Costing Income Statement]. 

3.4. Considering quantitative and qualitative issues, critically evaluate then advise Flexi Sportswear Ltd Directors whether to satisfy (honour) or breach (dishonour) the Tennis ball contract. Also consider other practical options Flexi Sportswear Ltd can consider so that demand is met including implications of such options.

3.5.  Discuss and critically examine the usefulness of budgeting to Flexi Sportswear Ltd. 

NB: In your analysis, please cite credible sources using Harvard reverencing style per Birmingham City University (BCU) requirements. Support and guidance can be sought from The Centre for Academic Success and the Library). 

Learning outcomes and assessment criteria specific to this assignment:

On completion of this assignment, students should be able to demonstrate their ability to:

LO1 - Evaluate the different competing financial objectives of the firm and the agency problem between shareholders and managers in publicly listed companies.
LO2 - Demonstrate the ability to analyse financial data, conduct cost-benefit analysis and financial planning for effective business decisions using spreadsheet software package.
LO3 - Critically evaluate investment projects using appropriate investment appraisal techniques to assess suitability and viability of the projects consistent with the overall strategy and business model(s) of the firm.
LO4 - Critically appraise the major issues of capital management, relative advantages and disadvantages from the various perspectives of the stakeholders of the firm.