Managing Financial Resources and Decisions Date of submission 15th

December 2009

 ASSIGNMENT GUIDELINES
1. During your Structured Individual Study (SIS), you are required to answer each

UNIT Managing financial resources and Course HND in

decisions Business

LECTURER SHYAM KUMAR VERIFIER

SHARMA

HAND OUT 26th October 2009 SUBMISSION 15th December 2009

DATE DATE

STUDENT TERM September 2009

question (Outcomes Assessment Criteria) which has been covered separately in

respective Lessons;
2. In your answer, write about the key concepts highlighted by the Lesson
(underpinning knowledge);
3. Look for real-life examples to apply your key concepts (applied knowledge);
4. Make use of the SIS time to research books;
5. During your SIS time, use the computer to research recommended websites and word
process your Assignment;
It is important that the work you produce is carefully planned & written.

Your work should demonstrate;

(a) Your understanding of the theory you have learned (underpinning knowledge) and
(b) Your ability to apply it to real life/contemporary situations/case study (applied
knowledge).
Please follow the instructions below:

1. Start each answer from a new page;

2. Highlight each question clearly;
3. Avoid bullet points and restrict the use of numberings; remember that you are
supposed to write an essay;
4. All work should be comprehensively referenced and all sources must be
acknowledged fully, this includes books & journals used as well websites visited.
Details such as page numbers, publishers and publication year should also be stated,
in addition to the name of the author(s) and publication. Books, articles and journals
should be the main sources; net sources are allowed up to 25% max;
5. Follow Harvard Referencing system;
6. All work should be word-processed;
7. Pages should be numbered (bottom right hand corner);
8. Assignment sheet should be attached in the front;
9. Spell checks the document and read thoroughly for grammatical errors;
10. 1.5-line spacing is preferred;
11. Bibliography at the end of the assignment;
The correct format to answer each question (Task) is as follows:
1. Introduction (analyze the question – which theory is it trying to ask you to
demonstrate?)
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

2. Underpinning Knowledge (write about the relevant theory/points)

3. Applied Knowledge (apply the theory/points you have written about in your
underpinning knowledge to your case study/real life example)
4. Conclusion (summarize what you have written in 2 & 3 above).

 ASSIGNMENT REGULATIONS
Please refer to the HND Business student handbook given at the beginning of your
programme.

1. Alpha plc is planning to build production facilities to introduce a major new product at a
cost of $ 12 million.

The board of directors has already approved the project on the basis that it will yield a positive
NPV when discounted, over a ten year period, at the company’s market weighted average cost of
capital. The investment is expected to increase profit before interest and tax by approximately
25%.

No internally-generated funds are available.

The finance director has suggested three possible sources of finance.

1. A five year $ 12 million floating rate term loan from a clearing bank, at an initial interest
rate of 10%.
2. A ten-year € 16 million fixed-rate loan from the Euro-currency market at an interest rate
of 7%.
3. A right issue at a discount of 10% on the current market price. The company’s share price
is 170 cents.
The current summarized financial statements are shown below.
Summarized balance sheet as at 31st December 20X1

$000 $000

Non-current assets at NBV

38,857
Current assets 18,286
Current liabilities (16,914)
------------
Net current assets
1,372

---------
40,219

----------
Financed by
Share capital:
Ordinary shares of 25 cents each
7,200
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

Reserves
19,813
Loan capital:
11% loan notes 20X4/20X7
13,166

---------

40,219

---------

Summarized income statement for the year ended 31st December 20X1

$000
Turnover 57,922
---------
Profit before interest and taxation 7,744
Debenture interest 1,448
---------
6,296
Taxation 3,148
---------

Profit available for ordinary shareholders

3,148
Ordinary dividend 2.250
--------
Retained profits 898
---------
Corporation tax is at 50%
Exchange rates (€ 1=….)
$
Spot rate 1.2010-1.2028
1 year forward 1.2760-1.2785

Acting as a consultant to Alpha plc, prepare a report which:

Discuss the advantage and disadvantages of each of the three suggested sources of finance
illustrating how the utilization of each source might affect the various providers of finance.
(Relevant calculations are an essential part of your report.)
Suggest other sources of finance that might be suitable for this investment.
Compare the cost of different sources of finance and what’s the importance of financial planning
in decision making?
1. Purple Co is considering a potential project with the following forecasts:
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

Now T1 T2 T3
Initial investment ($ millions) (1000)

Disposable proceeds ($millions) 200

Demand (millions of units) 5 10 6

The initial investment will be made on the first day of the new accounting period.
The selling price per unit is expected to be $100 and the variable cost $30 per unit. Both of these
figures are given in today’s terms.
Tax is paid at 30%, one year after the accounting period concerned.
The company has a real required rate of return of 6.8%.
General inflation is predicted to be 3% pa but the selling price is expected to inflate at 4% and
variable costs by 5% pa.
Determine the NPV of the project. (Work in $ millions).
Explain the importance of budget in pricing decision making.

2. Study the following financial statements for two very similar privately owned department
stores which comprise of one store in the city centre of a major UK city and then answer
the questions which follow.
Summary of financial statements
Balance sheets A B
£000s £000s £000s £000s
Fixed assets
Building at cost 300 440
Less depreciation to date (255) (220)
45 220
Equipment at cost 140 180
Less dep. to date (119) (90)
21 90
----- -----
66
310
Current assets
Stock 200 240
Debtors 205 140
Bank 4 2
------- -------
409 382
Less current liabilities
Creditors (245) (252)
164 130
------- -------
230 440
------- --------
_________ ________
Financed by:
Capital accounts
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

Balance at start of year 240 430

Add net profit 60 90
------- -------
300 520
Less drawing (70) (80)
------- -------
230 440
-------- --------
_______ ______
Trading and profit and loss accounts
Sales 1800 2700
Less cost of goods sold
Opening stock 300 280
Add purchases 1300 2250
------- --------
1600 2530
Less closing stock (200) (240)
(1400) (2290)
--------- --------
-
Gross profit 400 410
Less depreciation 22 40
Other expenses 318 280
------ -------
(340) (320)
----------
---------
Net profit 60 90
---------
---------
__________
________
(a) Calculate the following ratios:
i. Gross profit as percentage of sales
ii. Net profit as percentage of sales
iii. Expenses as percentage of sales
iv. Stock turn
v. Rate of return of net profit on capital employed ( use the average of the capital
account for this purpose)
vi. Current ratio
vii. Acid test ratio
viii.Debtor: sales ratio
ix. Creditor : purchases ratio
(a) Drawing upon all your knowledge of accounting, comment upon the differences and
similarities of the accounting ratios for A and B. which business seems to be most
efficient? Justify your opinion.
(b) Explain the purpose of main financial statements and how does it differ for different
business organization?
Managing Financial Resources and Decisions Date of submission 15th
December 2009

1. The directors of Axis Ltd. are currently considering two mutually exclusive investment
projects. Both projects are concerned with the purchase of new plant. The following data
are available for each project:
Project 1 Project 2
£ £
Cost (immediate outlay) 100,000 60,000
Expected annual net profit (loss):
Year 1 29,000 18,000
Year 2 (1000) (2000)
Year 3 2,000 4,000
Estimated residual value 7,000 6,000

The business has an estimated cost of capital of 10% and employs the straight line
method of depreciation for all fixed assets when calculating net profit. Neither project
would increase the working capital of the business. The business has sufficient funds to
meet all capital expenditure requirements.

Required:
(a) Calculate for each project:
i. The net present value
ii. The approximate internal rate of return
iii. The payback period.
(a) State which, if any, of the two investment projects the directors of Axis Ltd. should
accept, and why?
(b) State, in general terms, which method of investment appraisal you consider to be
most appropriate for evaluating investment projects and why?
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

Outcomes and assessment criteria for managing financial resources and

decisions

Outcomes Assessment criteria for pass

Syllabus
To achieve each outcome a learner covered
must demonstrate the ability to:

1 Explore the • identify the sources of finance available Q 1 Covers

sources of to a all these
finance available requireme
business
to a business nts
• assess the implications of the different
sources

• select appropriate sources of finance

for a business Project

2 Analyze the • assess and compare the costs of Q 1 Covers

implications of different sources of finance all these
requireme
finance as a • explain the importance of financial
nts
resource within planning
a business
• describe the information needs of
different decision
 Managing Financial Resources and Decisions Date of submission 15th
December 2009

3 Make financial • analyze budgets and make appropriate Q2&Q4

decisions decisions Covers all
these
based on • calculate unit costs and make pricing
requireme
financial decisions using relevant information
nts
information • assess the viability of a project using
investment appraisal techniques

4 Analyze and • explain the purpose of the main Q 3 Covers

evaluate the financial statements all these
requireme
financial • describe the differences between the
nts
performance of formats of financial statements for
a different types of business

business • analyze financial statements using

appropriate ratios and comparisons, both
internal and external