Managing Financial Resources and Decisions (MRFD Assignments UK)

Managing Financial Resources and Decisions (MRFD Assignments UK)

Learning Outcomes 1: Understand the sources of finance available to a business

1.1 Identify the sources of finance available to a business

1.2 Assess the implications of the different sources

1.3 evaluate appropriate sources of finance for a business project Report

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Learning Outcome 2: Understand the implications of finance as a resource within a business

2.1 Analyse the costs of different sources of finance

2.2 Explain the importance of financial planning

2.3 Assess the information needs of different decision-makers Report

2.4 explain the impact of finance on the financial statements

Learning Outcome 3: Understand ways of using motivational theories in organisations.

3.1 Analyse budgets and make appropriate decisions

3.2 explain the calculation of unit costs and make pricing decisions using relevant information

3.3 assess the viability of a project using investment appraisal techniques Report

Learning Outcome 4 Be able to evaluate the financial performance of a business

4.1 discuss the main financial statements

4.2 compare appropriate formats of financial statements for different types of business

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4.3 interpret financial statements using appropriate ratios and comparisons, both internal and external. Report 8 TASKS LO1 Scenario: Richard Milner is the second son of James Milner an established industrialist in the North of England. After graduating with a first class production engineering degree at the age of 25 from Manchester University, Richard began his career as a trainee engineer with ICI Plc in 1999. Since then he has moved from and to many well-known international companies each time with a promotion and increase in pay. In 2010 he accepted a challenging post as the Chief Engineer in Western Australian Railways and settled in Australia comfortably with his wife and son. Milner family is well known in the north of the country for many decades. Four generations ago hardworking and intelligent great grandfather of James Milner started a small chemical manufacturing business in 1935. The business grew fast during the world war II and continued to expand every decade. James Milner assumed the responsibility of the Chief Executive in 2000. In the same year William the elder son of the family joined the company as the accountant and gradually achieved the rank of Chief Accountant. James Milner has managed the company affairs very successfully with the help of his first son. The business Milner Chemicals Plc is mainly owned by the Milners. There have been some employees who have got a few thousand shares through the employee share option schemes. The business is very successful but has retained its family ownership for more than 80 years. Events took an unexpected turn in 2014. William Milner the elder brother of Richard died suddenly of cancer. This has affected the health of James Milner who was hoping to hand over the reign to his elder son and enjoy a peaceful retirement. As he could not cope with the responsibilities of the CEO of a large public company, he turned to his second son Richard. Richard has not shown any interest in the family business so far. Though he is a very competent engineer he has no knowledge about financial management. However he had to comply with his father’s wish and resigned his post in Dec 2014 and moved back to England to accept the running of the family enterprise. On reviewing the performance of the company Richard realised the efficiency with which his father and grandfather had run the affairs of the company. The company has developed a skilled and loyal workforce as well has built a solid financial base. In the credit crunch period of 2008 – 2012 the company halted any expansion and concentrated on survival. This has been achieved successfully and the company was well placed to expand its production capacity. Demand for the products was increasing. Overall the company was ready for further growth by organic growth as well as by acquisition. Richard also quickly realised that UK was once again poised to become a major manufacturing base in the world. Many companies were returning to the UK closing their Chinese production facilities. Demand for British goods was increasing worldwide bringing new opportunities for exports to Asia and Africa. The new governor of the Bank of England Mark Carney has announced that the interest rate would continue at the current historically low rates for years to come. The stock market was recording significant gains in the previous twelve months. The wages are comparatively low (in Europe) and expected to continue at these low rates for many years to come. Richard had met the senior executives of the company. He could see that he could expand the business rapidly if he could access vast sums of money at low cost. His senior managers advised him to seek a listing in the London Stock Exchange in order to raise the capital the company requires. Therefore Richard asked his Finance Manger to give him a report to help him make the decision. LO2 Scenario: You work for an accounting firm Brian Harris Chartered Accountants as a part time assistant. The accountancy firm has a client X limited. X limited is a small but growing company. It does not have a proper accounting or Finance Department. All the accounting services are provided by the accounting firm ‘Brian Harris Chartered Accountants’. The company now wants to stream line its accounting and finance functions in order to smoothen the information flow to facilitate better and more effective decision making. They have given this assignment to firm ‘Brian Harris Chartered Accountants’. The Statement of Financial position at 31.12.2015 has the following details. £000 Ordinary Share Capital ( N.V = £1 per share) 2,000 Revaluation Reserve 1,000 Retained Earnings 1,500 Total Equity Value 4,500 Long Term Liabilities : 10 % Debentures 1,000 In addition the following information is provided: On 1.1.2016 the company issued 12% Preference shares at a price of £1.20 each. This price was accepted as the correct value for the preference shares at that date. The directors estimated that the appropriate value for each ordinary share was £2.00. The company paid an ordinary dividend of 10 p per share on 31.12.2015. The directors have expressed their commitment to increase the annual dividend by 8% per annum in the future. Recently one of the debenture holders sold some debentures to another debenture holder at an arm’s length transaction. The price was £125 per £100 nominal value of the debenture. The directors say that this value can be accepted as a correct basis to value the debentures. Assume that the company pays 20% tax.

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Task 2:

Task 2.1 a) Calculate the cost of ordinary Share Capital at 1.1.2016. (You should explain why you are using one model than the other model in your answer).

  1. b) Calculate the cost of preference Share Capital at 1.1.2016
  2. c) Calculate the cost of debenture Capital after tax at 1.1.2016.
  3. d) Calculate the weighted average cost of capital of the company at 1.1.2016. End of Task 2.1

Task 2.2, 2.3, 2.4 The directors want to have a report explaining the following points.

2.2: Importance of financial planning.

2.3: Informational needs of Directors, Senior Managers and Junior Managers.

2.4: Impact of finance on the financial statements Prepare a report for the directors explaining the above points. (Word Count- 1000- 1500 words) LO3 Task 3:The accountant of X Plc is collecting information to prepare the budget for the following year. X Plc intends to produce two products Gold Tap and Silver Tap next year. The budgeted quantities for next year are 2000 units of Gold Tap and 4000 units of Silver Tap. Additional information relating to the products is given below. Per unit: Gold Tap Silver Tap £ £ Direct Material 4 kg @ £5/kg 20 3kg @ 5/kg 15 Direct Labour 5 hrs @£10/hr 50 2.5 hours @£10/hr 25 Variable Overhead 10 10 Fixed Overhead (Total) £ 80,000 per annum. The company uses Absorption costing system to calculate the cost of the products. The fixed overhead is absorbed on the basis of budgeted direct labour hours. The overhead costs are production overhead costs only. Ignore administration add distribution overhead costs. (Task 3.2 should be assessed before Task 3.1) Task 3.2 i) Calculate the fixed overhead absorption rate per direct labour hour. ii) Calculate the fixed overhead cost per unit for each product. iii) Calculate the budgeted production cost per unit for each product. iv) The company adds 25% mark up to the production cost to the selling price. Calculate the budgeted selling price per unit for each product. Task 3.1 i) Prepare the Production Budget in units and in monetary terms. Assume that there will be no opening or closing stock of either product or raw material for the following year. ii) Produce the Budgeted Profit and Loss Account for the following year. iii) The company expects to earn a Budgeted Profit of £125,000 next year. Without reducing the selling price of Gold Tap it is possible to increase the volume of sales of Gold Tap. This will not affect the fixed production overhead cost (assume the volume 9of sales and selling price of Silver Tap are not affected). Calculate the level of sales required to produce the required level of profits. Task 3.3 A company is considering the purchase of a new machine. The price of the machine is £1m now. After 5 years the scrap value will be £200,000. The company uses straight line method of depreciation. The operating cash flows expected from buying the machine are: £ Year 1 240,000 Year 2 200,000 Year 3 280,000 Year 4 320,000 Year 5 160,000 The cost of capital of the company is 10% a) Calculate the following: i) Pay Back Period ii) Accounting Rate of Return. iii) Net Present Value b) The company uses the following criteria to evaluate the viability of an investment appraisal proposal. I) a target payback period of 4 years and ii) NPV Positive Will the proposal to buy the machine meet the criteria of the company? LO4 Task 4: Task 4.1: Name the main financial statements prepared by business organisations annually. Explain the type of information provided by each statement. Also discuss the main item found in each statement. Task 4.2: Show the different formats of Income Statements used by manufacturing companies, trading organisations and clubs. (You may search the internet or examples used in text books for this part of the assignment). Compare the different formats and explain why the format used by each concern is appropriate in the case of that particular organisation. Task 4.3: Wordsworth Plc has been experiencing some difficulties in recent years. The shareholders are concerned about the future of the company and had convened to discuss their investment in Wordsworth Plc. They are not satisfied with the efficiency of the directors or about the company’s recent operating performance, and have requested you to advise them by analysing the latest set of financial accounts. Summary Accounts to 31 March 2016 of Wordsworth Plc Income Statement for year ended: 2016 2015 £’000 £’000 Sales 15,712 6,375 Cost of sales 11,400 4,212 Gross profit 4,312 2,163 Selling and distribution costs (2,240) (840) Administrative expenses (2,000) (935) Operating profit 72 388 Interest (50) (40) Profit before taxation 22 348 11 Summary of Grades In order to achieve a pass in a unit •All learning outcomes and associated assessment criteria have been met. In order to achieve a merit in a unit •All learning outcomes and associated assessment criteria.

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