Case studies

Case 1
Case 2
Case 3
Case 4
Case 5
Case 6

Pace Leisurewear plc (1)

Carpetright plc
Gadabout Ltd
Pace Leisurewear plc (2)
Landlord investment appraisal
Blue Hills Country Park

You may be required to undertake a case study for at least one of your assignments.
A case study tends to differ from the more traditional accounting exercise in three
ways:

Cases tend to be longer and more complex than traditional exercises. They
also tend to deal with more than one aspect of a business.
Cases often contain information that is irrelevant and that needs to be
ignored.
There is no one single, correct solution. The proposed solution will rely on
assumptions and judgements made by the student.

In these ways, case studies reflect real life. In reality, problems are often
complicated, multi-faceted and you may have to separate out the relevant from the
irrelevant data. Often there is no uniquely correct solution. Thus case studies can
provide an opportunity to handle much more realistic and interesting problems than
can traditional exercises.
A difficulty with case studies is that the problem to be solved is not always
obvious or clear-cut. It is therefore a good starting point to try to identify what the
problem really is. You must be able to distinguish between the causes of the
problem and its symptoms. For example, a fall in profitability may be a symptom of
some underlying cause such as a poor pricing policy.
Try not to waffle. It is important to get to the point. Marks in an examination when
dealing with a case study are usually awarded for a clear and concise explanation of
the problems and any proposed solutions; long, tortuous explanations may indicate
that you have not got to the heart of the matter. Furthermore, do not include large
chunks of the case study in your final report or presentation. This, too, may suggest
that you have not grasped the key issues and that you are simply repeating rather
than using the information provided.
Working in groups is sometimes an effective way to approach solving a case
study. This is because people can spark off each other to come up with ideas that
could help towards a solution. Do not be too quick to dismiss ideas from others that
do not run along lines you have already developed, and do not be critical of ideas
that come from individuals who are not seen as the academic high flyers. Good
ideas do not always come from expected sources. The more supportive the group is
towards all its members, the more likely it is to work effectively and arrive at a
feasible solution.

Pearson Education Limited 2002

Sometimes an assignment involves giving a presentation. If this is the case,

thought must be given to how the solution is to be presented to make the maximum
impact on the audience. This may mean the use of overhead projector slides or
even of video, depending on the circumstances. Check with your tutor about the
availability of necessary equipment.

Pearson Education Limited 2002

Pace Leisurewear Ltd (1)

This is absolutely typical of British banks. As soon as you have any success they
want to pull the plug and stop you trading. Jill Dempsey was very angry. She is the
managing director of Pace Leisurewear Ltd and had just received a letter from the
companys bank requiring a significant reduction in the overdraft. This is ridiculous,
agreed Mike Greaves, the production director. Last year we had a cracking year
and it looks set to continue. We had a big order in from Arena just this morning. If we
cant keep up the overdraft, we wont be able to fulfil that order. Arena was one of
several national chains of casual and sportswear stores that was placing substantial
orders with Pace, usually to be sold under the Pace label but in some cases under
the stores own-brand label.
Pace Leisurewear Ltd was started by Jill Dempsey and Mike Greaves five years
ago. The business is a designer and manufacturer of casual and leisure clothes
aimed particularly at the younger, higher-income market. Before starting the
company, both had been employed as senior managers with Verani plc, a large UK
clothes manufacturer. They decided to form Pace Leisurewear after their ideas for
developing a new range of clothes for younger people had been rejected by Verani.
Although their former employer liked the ideas proposed, it was restructuring its
operations after three consecutive years of losses and had decided to focus on
certain core brands aimed at meeting the needs of older people requiring smart day
and occasion wear. The proposals by Jill and Mike did not, therefore, fit with the
strategies that Verani had just begun to implement.
From the outset, Jill and Mike decided that Pace Leisurewear would be a designand-marketing led business. Both felt that many of the problems experienced by
Verani could be traced to weaknesses in these areas and they were determined that
this would not occur in their newly formed business. Much of the forward planning
was concerned with integrating the product design and development with the sales
and marketing operations of the business. The new company had taken a lot of
trouble and spent a lot of money on employing a young and talented design team,
led by Jane Barker who had been employed previously as a chief designer for a
leading sportswear brand. The range of clothes designed by Jane and her team was
greeted with enthusiasm by the major buyers, and this was converted into firm
orders by the marketing team led by Jill Dempsey. The order book began to grow
and, for the new season, orders had reached their highest level ever.
Pace Leisurewear began trading during a period of recession when people did
not have a great deal of money to spend on clothes. However, sales started to
increase significantly as the economy began to come slowly out of recession and as
export markets in France and Switzerland were opened. Jill and Mike were both
surprised and delighted by the speed with which the sales of the business had
grown in recent years and by the growing base of regular customers. The order just
received from Arena was seen as particularly important. If Arena became a regular
customer, the sales of the company were likely to increase rapidly over the next few
years and would establish Pace Leisurewear as a major player in the market.
Jill and Mike had both invested their life savings in the business and had taken
out large mortgages on their respective houses to help finance the new company.
However, this provided only a relatively small amount of the total ordinary share
capital needed. In order to raise the remaining share capital, friends, family and
3

Pearson Education Limited 2002

business contacts were approached. The largest shareholder of the business was
Keeble Estates Ltd, owned by David and John Keeble. The two Keeble brothers had
made large profits by land speculation over the years but were keen to diversify into
other areas as their business had been particularly hard hit by the recent recession.
They had known Jill for many years and were convinced that she and Mike would
make a success of the new business.
The board of directors of Pace Leisurewear Ltd and their shareholdings were as
follows:
Jill Dempsey
Mike Greaves
Jane Barker
David Keeble
John Keeble

Managing director and marketing director (350,000 shares)

Production director (350,000 shares)
Design director (20,000 shares)
Chairman (1,000,000 shares owned jointly with brother John
through Keeble Estates)
Non-executive director

In addition to his role as production director, Mike tended to look after financial
matters. Though the company had accounts staff who dealt with the day-to-day
transactions, there was no one within the company who had any great financial
expertise. When there was a problem, the companys auditors were normally asked
for advice.
On the day that the letter from the bank was received, a board meeting was due
to take place to consider the draft accounts of the business for the year that had
ended two months earlier. At this meeting, the letter from the bank was also
distributed to board members for discussion.
Mike Greaves began the discussion by saying:
Weve just received the draft accounts from the auditors, which seem to confirm
our success. Profit has more than doubled. I really cant see how the cash
situation is so poor. I know that we spent a lot on that additional plant and that we
didnt get anything from the old machines we got rid of, but most of that was
covered by the bank loan. Really, the cash situation should be even better than
the profit level implies because the expenses include about 2.8 million for
depreciation and we dont have to write a cheque for that.
Jill Dempsey, who was still angry at what she regarded as the high-handed
attitude of the bank, pointed to the difficulties that the banks demands would cause:
The bank wants us to reduce the overdraft by half over the next six months! This
is crazy. I tried to explain that we have important orders to fulfil but the manager
wasnt interested. How on earth can we find this kind of money in the time
available? We are being asked to do the impossible.
Both Mike and Jill had, before the meeting, hoped that the Keeble brothers would
be prepared to help out by purchasing further shares in the company or by making a
loan. However, it was soon made clear by David Keeble that further investment was
not a possible option. Keeble Estates had been experiencing considerable problems
over recent years and simply did not have the money to invest further in Pace
Leisurewear. Indeed, the Keeble brothers would be prepared to sell their shares in
Pace to generate much-needed cash for their ailing company.

Pearson Education Limited 2002

Finding a prospective buyer for the shares was not, however, a likely prospect at
this point. Both David and John Keeble had been heavily involved in recent years
with the problems of Keeble Estates and had taken little interest in the affairs of
Pace Leisurewear. The board meeting made them realise that they should have
been much more attentive, and they now faced the prospect of being major
shareholders of two failed companies unless things could be radically improved.
The accounts of Pace Leisurewear for the past two years are set out below.
Profit and loss account for the year ended 31 December:
Year before last
000

Last year
000

14,006
7,496
6,510
4,410
2,100
432
1,668
420
1,248
600
648

22,410
11,618
10,792
6,174
4,618
912
3,706
780
2,926
800
2,126

2,626

3,274

3,274

5,400

Turnover
Cost of sales
Gross profit
Operating expenses
Operating profit (before interest and taxation)
Interest payable
Profit before taxation
Taxation
Profit after taxation
Dividend paid and proposed
Retained profit for the year
Retained profit brought forward from
previous year
Retained profit carried forward

Pearson Education Limited 2002

Balance sheet as at 31 December:

Year before last
000
000

Last year
000
000

8,600

14,470

Fixed assets
Current assets
Stocks
Trade debtors
Other debtors
Cash
Creditors: amounts falling due
within
one year
Trade creditors
Other creditors
Taxation
Dividends
Bank overdraft
Net current assets

2,418
1,614
268
56
4,356

5,820
3,744
402
8
9,974

1,214
248
420
600

2,482

2,612
402
780
800
4,250
8,844
1,874
10,474

1,130
15,600

3,600
6,874

6,600
9,000

3,600
3,274
6,874

3,600
5,400
9,000

Creditors: amounts falling due

within one year
Loan capital
Capital and reserves
Ordinary shares of 0.50 each
Retained profit

The board of directors was not able to agree on a way of dealing with the
financial problem faced by the company. Jill believed that their best hope was to
continue to wrangle with the bank over its demands. She felt that there was still a
chance that the bank could be persuaded to change its mind once the draft
accounts for last year were made available and once the bank was informed of the
implications for the company of paying off such a large part of the overdraft in such
a short period of time. Mike and Jane, on the other hand, were not optimistic about
the prospects of changing the banks position. The company had breached its
overdraft limit on several occasions over the past few years and they knew that the
patience of the bank was now wearing thin.
The directors believed that the only real solution was to look for someone who
was prepared to make a significant investment in the business. They felt that only a
large injection of new funds could keep the business on track. Like Jill, the other
board members believed that the draft accounts demonstrated the success of the
business over recent years and that this evidence would make the business
attractive to a potential investor. The Keeble brothers rejected both of these views
as being impractical. In addition, they were against the idea of introducing another
major shareholder to the company as this was likely to dilute their influence over the
future direction of the business. The brothers believed that drastic and immediate
6

Pearson Education Limited 2002

action was required by the board, although they were not sure what form of action
should be taken.
After several hours of discussion, it was clear that the financial issue was not
going to be resolved at the meeting. Instead, it was agreed that expertise from
outside the company should be sought to help the company find a feasible solution
to the problem. The board decided to approach Drake Management Consultants,
which specialises in helping businesses with financial problems, and to ask the firm
to produce a plan of action for the boards consideration. Jill agreed to contact the
firm of consultants on behalf of the board and to agree the terms of reference for the
work required. She was, however, apprehensive about what the proposed plan of
action would contain. Immediately after the board meeting she discussed her
concerns with Mike. She said, It seems we have to pay a penalty for our success. I
only hope this penalty wont involve undoing all our good work over the years.
Required:
Assume that you are a member of Drake Management Consultants. Prepare a
report for the board of directors of Pace Leisurewear Ltd that analyses the
problems faced by the company and that sets out a detailed plan of action for
dealing with its financing problem.

Pearson Education Limited 2002

Carpetright plc

Carpetright plc is a carpet retailer that operates a network of stores throughout the
UK and aims to be the largest and most profitable carpet retailer in the UK. The
market for floor coverings has not been very buoyant in recent years and for
Carpetrights year ended 26 April 2001 there was no growth in the market at all.
Given the general state of the market and the ambition of the business,
Carpetright has committed itself to increasing sales by increasing its share of the
floor coverings market. At present, the UK market is very fragmented, with around
60 per cent of the total market being supplied by thousands of small independent
retailers.
The company operates through four trading formats:

Carpetright is a value-for-money trading format aimed at the lower and middle

sectors of the market
Carpet Depot is a superstore and showroom format offering a wide range of
more expensive and branded products
Harris Carpets (named after the Chairman of Carpetright plc, Lord Harris)
operates from high street and out-of-town sites
Harris Carpet at home aims to compete with the high street for the 50 to 60
per cent of shoppers who do not buy their floor coverings in out-of-town
centres and operates from 17 vans

By the end of April 2001, the company had 325 stores in total, compared with 321
at the previous year-end.
The profit and loss account and cash flow statement for the year ended 26 April
2001 and the balance sheet at that date are shown below, along with extracts from
the notes to these accounts.
Required:
From the information provided, comment on the financial performance and position
of Carpetright plc for the year ended 28 April 2001 from the viewpoint of:
(a) A private shareholder who holds 1 per cent of the ordinary shares.
(b) A carpet manufacturer which has been asked to supply the company with a
large quantity of carpets on credit.

Pearson Education Limited 2002

Profit and loss account

for the year to 28 April 2001
Year to
28 April 2001
000
322,917)
(138,275)

Year to
29 April 2000
000
304,818)
(140,610)

184,642)
(3,440)
(137,499)
974)

164,208)
(2,488)
(125,560)
693)

44,677)
154)
(279)

36,853)
38)
(334)

44,552)

36,557)

(12,837)

(10,944)

6
14

31,715)
(20,428)
11,287)

25,613)
(17,927)
7,686)

7
7

pence
42.0
41.9

pence
33.3
33.3

Note
1, 2

Turnover
Cost of sales
Gross profit
Distribution costs
Administrative expenses
Other operating income
Operating profit
Profit on disposal of fixed assets
Net interest payable
Profit on ordinary activities before
taxation
Tax on profit on ordinary activities
Profit for the financial period
Dividends paid and proposed
Retained profit for the period
Basic earnings per share
Diluted earnings per share

There are no differences between the Companys historical cost profit and that
recorded in the profit and loss account (2000: nil).
All turnover, operating profit and the profit on disposal of fixed assets of the
Company arise from continuing operations.
Statement of total recognised gains and losses for the year to 28 April 2001
000
000
Profit for the financial period
31,715
25,613
Exchange rate movement
14
1

Total recognised gain relating to the year

31,716
25,613

Pearson Education Limited 2002

Balance sheet
at 28 April 2001

Tangible fixed assets

Current assets
Stocks
Debtors
Cash at bank and in hand
Creditors: amounts falling
due within one year
Net current liabilities
Total assets less current
liabilities
Creditors: amounts falling
due after more than one year
Provisions for liabilities and
charges
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account
Equity shareholders funds

Note
8
9
10
11

28 April
2001
000

28 April
2001
000
90,297)

28,453)
11,144)
16,220)
55,817)
(93,474)

29 April
2000
000

29 April
2000
000
70,986)

22,268)
11,783)
8,565)
42,616)
(75,239)
(37,657)
52,640)

(32,363)
38,363)

12

(4,699)

(2,674)

13

(332)

(111)

47,609)

35,578)

756)
12,395)
42)
34,416)
47,609)

755)
11,653)
42)
23,128)
35,578)

14
14
14
14

These accounts were approved by the Board of Directors on 25 June 2001, and
were signed on its behalf by:
Lord Harris of Peckham
S J Winning
Directors

10

Pearson Education Limited 2002

Cash flow statement

for the year to 28 April 2001

Net cash inflow from

operating activities
Returns on investments and
servicing of finance
Interest received
Interest paid
Interest on finance leases
Net cash outflow from
investments and
servicing of finance
Taxation
UK Corporation Tax paid
Tax paid
Capital expenditure
Payments to acquire tangible
fixed assets
Receipts from sales of
tangible fixed assets
Net cash outflow for capital
expenditure
Equity dividends paid
Net cash inflow before
financing
Financing
Issue of Ordinary shares
Purchase of own shares
Capital element of finance
lease rentals
Net outflow from financing
Increase in cash in the
period

Year to
28 April
2001

Year to
28 April
2001

000

000
58,832)

Note
20

Year to
29
April
2000
000

286)

99)

(243)
(300)

(408)
(158)
(257)

(10,504)

000
47,129)

(467)
(5,597)

(10,504)

(5,597)

(23,624)

(7,783)

1,092)

3,649)
(22,532)

(4,134)

(18,515)
7,024)

(17,590)
19,335)

743)

(1,218)

197)
(7,961)
(531)
(475)
6,549)

11

Year to
29 April
2000

Pearson Education Limited 2002

(8,295)
11,040)

Note Reconciliation of net cash flow to movement in net funds

2001
000
6,549)
5,119)
11,668)
3)
(3,369)
8,302)

2000
000
11,040)
(2,475)
8,565)
)
(3,446)
5,119)

Exchange
difference
000
3

2001
000
16,220)
(1,103)
15,117)
(6,815)
8,302)

Increase in cash in the period

Opening net funds/(debt)
Exchange difference
Finance leases
Closing net funds
Note Analysis of changes in net funds during the year

Cash at bank and in hand

Overdraft
Finance leases
Net funds

2000 Cash flow

Other
000
000
000
8,565)
7,652)

)
(1,103)

8,565)
6,549)

(3,446)
1,218) (4,587)
5,119)
7,767) (4,587)

Notes to the accounts

1 Principal accounting policies
(a) Accounting convention
The Accounts are prepared under the historical cost convention and in accordance
with applicable accounting standards.
The following accounting policies have been applied consistently in dealing with
items which are considered material in relation to the Companys financial
statements.
(b) Turnover
Turnover represents the value of goods sold to customers excluding value added
tax.

12

Pearson Education Limited 2002

(c) Depreciation
Depreciation is provided to write off the cost of fixed assets on a straight line basis
over their estimated useful lives as follows:
Freehold and long leasehold buildings
Short leasehold buildings
Fixtures and fittings
Plant and machinery
Computers
Motor vehicles

2% p.a.
Length of lease
10% to 15% p.a.
10% to 15% p.a.
15% to 20% p.a.
25% p.a.

Freehold land is not depreciated.

(d) Stock
Stock is valued at the lower of cost and net realisable value.
(e) Deferred taxation
Deferred taxation is calculated under the liability method and is only provided where
there is a reasonable probability that a liability will crystallise.
(f) Leased assets
Assets financed by leasing agreements that give rights approximating to ownership
are held under finance leases and included in tangible fixed assets and depreciated
over the shorter of their estimated useful lives or the period of the lease. Rentals are
apportioned between reductions in the capital obligations included in creditors and
those amounts relating to finance charges, which are charged to the profit and loss
account at a constant periodic rate of charge.
All operating lease rentals are written off to the profit and loss account on a straight
line basis over the term of the lease.
Income under operating leases is credited to the profit and loss on a receivable
basis.
(g) Pensions
The Company operates a defined benefit pension scheme. The cost of providing
pension benefits is spread over the expected working lives of pension scheme
members. The Company also operates a defined contribution scheme, contributions
to which are charged against profits as they become payable.
(h) Accounting for new stores
Benefits received as incentives to sign leases, in the form of reverse premiums and
post-opening rent free periods, are spread on a straight line basis over the period to
the first rent review.
Pre-opening costs are expensed to the profit and loss account as incurred.

13

Pearson Education Limited 2002

(i) Foreign currency

The results of overseas operations are translated at the average rate of exchange
during the period and the balance sheet at the rate ruling at the balance sheet date.
Exchange differences arising on the translation of opening net assets are dealt with
through reserves. In addition, exchange differences between the results translated
at an average rate and a closing rate are dealt with through reserves.
2 Segmental analysis
Turnover is attributable to carpet retailing activities in the UK and Southern Ireland.
No analysis of turnover, operating profit or net assets is shown because Southern
Ireland does not represent a material part of the results or assets.
3 Profit on ordinary activities before taxation
Profit on ordinary activities before taxation is stated after charging:

Depreciation
Auditors remuneration
Audit work
Non-audit fees paid to the auditors and their associates
Amounts payable under operating leases
Rents
Plant and machinery
Interest on bank overdraft
Interest on finance leases
Other interest
And after crediting:
Rent receivable
Interest receivable

2001
000
8,147

2000
000
7,547

55
16

56
12

37,066
522
66
300
146

35,345
424
289
158
39

974
233

693
152

4 Staff and directors

The average number of persons employed by the Company (including Directors)
was as follows:
2001
Number
2,677
216
2,893

Stores
Head Office and Warehouse

14

Pearson Education Limited 2002

2000
Number
2,489
194
2,683

The aggregate payroll costs of these persons were as follows:

Wages and salaries

Social security costs
Pension costs

2001
000
47,498
4,046
682
52,226

2000
000
41,714
3,630
561
45,905

2001
000
13,389
(552)
12,837

2000
000
11,020
(76)
10,944

2001
000

2000
000

8,316
12,102
10
20,428

7,736
10,189
2
17,927

5 Tax on profit on ordinary activities

UK Corporation Tax at 30% (2000: 30%)

Over provision in prior period

6 Dividends

Ordinary
Paid 11p (2000: 10p) per share
Proposed 16p (2000: 13.5p) per share
Under provision in prior period

7 Earnings per share

The calculated basic and diluted earnings per share for the year to 28 April 2001 is
based on earnings of 31,715,000 (2000: 25,613,000).
The weighted average number of shares used in the calculation of basic earnings
per share for the year to 28 April 2001 was 75,541,628 (2000: 76,972,848). The
weighted average number of shares used in the calculation of diluted earnings per
share was 75,624,153 (2000: 77,040,558).
Share options outstanding at less than fair market value of 82,525 (2000: 67,710)
represent the difference between the basic and diluted weighted average number of
shares.

15

Pearson Education Limited 2002

8 Tangible fixed assets

Cost:
At 29 April 2000
Additions
Disposals
At 28 April 2001
Depreciation:
At 29 April 2000
Charge for period
Disposals
At 28 April 2001
Net book value:
At 28 April 2001
At book value:
At 29 April 2000

Freehold
land and
buildings

Long
leasehold
land and
buildings

Short
leasehold
buildings

Fixtures
and
fittings

000

000

000

25,357
11,803

37,160

3,394

3,394

847
312

1,159

000

Plant and
machiner
y
000

000

10,610)
2,335)
(270)
12,675)

51,852)
8,310)
(1,390)
58,772)

13,872)
5,852)
(318)
19,406)

105,085)
28,300)
(1,978)
131,407)

64
25

89

1,897)
570)
(71)
2,396)

26,374)
5,762)
(879)
31,257)

4,917)
1,478)
(186)
6,209)

34,099)
8,147)
(1,136)
41,110)

36,001

3,305

10,279)

27,515)

13,197)

90,297)

24,510

3,330

8,713)

25,478)

8,955)

70,986)

Total

Computer equipment capitalised under finance leases

Cost and depreciation included

in plant and machinery above
Depreciation charge for the
year

2001
Cost
000
8,564

2001
Depreciation
000

2000
Cost
000
3,977

2000
Depreciation
000

143

If the total freehold land and buildings and long leasehold land and buildings are
valued at 40,554,000 at 28 April 2001, the building element subject to depreciation
is 18,053,000.
9 Stocks
All stock is held in the form of finished goods for resale.

16

Pearson Education Limited 2002

10 Debtors

Amounts falling due within one year:

Trade debtors
Other debtors
Advance Corporation Tax recoverable
Prepayments and accrued income

2001
000

2000
000

3,033
371

7,740
11,144

2,442
512
1,110
7,719
11,783

2001
000
1,103
2,116
42,962
18,081
12,102
7,432
8,485
1,193
93,474

2000
000

772
38,399
12,173
10,189
5,115
7,483
1,108
75,239

11 Creditors: amounts falling due within one year

Bank overdraft
Obligations under finance leases
Trade creditors
Accruals and deferred income
Ordinary Dividends payable
VAT
Corporation Tax payable
PAYE and National Insurance

The Companys unsecured bank overdraft is repayable on demand and carries a

commercial interest rate which moves in line with the Bank of England base rate. A
UK facility of 20,000,000 will be reviewed on 18 July 2001 and an Irish Punt facility
of 1,500,000 will be reviewed on 31 October 2001. Both facilities are reviewed
annually.
The Company has excluded short term debtors and creditors from all financial
instrument disclosures.
12 Creditors: amounts falling due after more than one year
2001
000
4,699

Obligations under finance leases

2000
000
2,674

The maturity of obligations under finance leases are all payable between two and
five years.

17

Pearson Education Limited 2002

13 Provisions for liabilities and charges

Amounts provided and unprovided in respect of deferred taxation are set out below:

Accelerated capital
allowances
Capital gains rolled over

2001
Provided
000
332

2001
Unprovided
000
2,079

2000
Provided
000
332)

2000
Unprovided
000
2,012

332

2,100
4,179

332)
(221)

1,984
3,996

332

4,179

111)

3,996

Advance Corporation Tax

recoverable

The movements on the deferred tax account are set out below:
000
111
221
332

At 29 April 2000
Advanced Corporation Tax recoverable
At 28 April 2001
14 Share capital and reserves
Ordinary shares of 1p each
Authorised 100,000,000 (2000: 100,000,000)
Issued and fully paid 75,640,243 (2000: 75,471,978)

2001

1,000,000
756,402

2000

1,000,000
754,720

The movement in share capital, share premium account and profit and loss account
comprises:

Balance at 29 April 2000

Issued share capital
Exchange rate movement
Retained profit for the period
Balance at 28 April 2001

Share
capital
000
755
1

756

Share
premium
account
000
11,653
742

12,395

18

Capital
redemption
reserve
000
42

42

Pearson Education Limited 2002

Profit
and loss
account
000
23,128

1
11,287
34,416

Shareholders
funds
000
35,578
743
1
11,287
47,609

Reconciliation of movements in shareholder funds

2001
000
31,715)
(20,428)
11,287)
1)
743)
)
12,031)
35,578)
47,609)

Profit for the financial period

Dividends
Retained profit for the period
Exchange rate movement
Issue of Ordinary shares
Purchase of own shares
Net increase/(decrease) in shareholders funds
Shareholders funds at 29 April 2000
Shareholders funds at 28 April 2001

2000
000
25,613)
(17,927)
7,686)
)
197)
(7,961)
(78)
35,656)
35,578)

At 28 April 2001 options over Ordinary shares under the Carpetright Executive
Share Option Scheme were outstanding as follows:
Ordinary
Shares
1,689
15,000
35,107
181,400
26,557
5,693
115,000
11,152
8,848
34,760
20,240

First
exercise
date
June 1996
February 1999
July 2000
October 2000
October 2000
October 2000
January 2002
January 2003
January 2003
January 2004
January 2004

Last
exercise
date
June 2003
February 2006
July 2007
October 2004
October 2004
October 2007
January 2006
January 2010
January 2007
January 2011
January 2008

Exercise price
per Ordinary
share (pence)
148
442
471
512
527
527
221
538
538
504
504

During the period 168,265 Ordinary shares were issued in consequence of the
exercise of options under the Executive Share Option Scheme for a total
consideration of 743,284.

19

Pearson Education Limited 2002

15 Financial commitments
(a) Capital commitments
Capital commitments at 28 April 2001 for which no provision has been made in the
Accounts were as follows:
2001
000
3,835

Authorised and contracted

2000
000
4,477

Of the above capital commitments contracted for but not provided, 1,674,000
(2000: 2,601,000) relates to the development of retail merchandise management
systems, which has been fully funded by a leasing facility provided by Siemens
Finance Limited following the period end.
(b) Operating leasing commitments
At 28 April 2001 the annual commitments in respect of land and buildings and other
assets under operating leases were as set out below:
2001
Land and
buildings
000
75
182
41,822
42,079

Operating leases which expire:

Within one year
Between one and five years
Over five years

2001
Other
000

2000
Land and
buildings
000

2000
Other
000

18
440

458

201
174
33,325
33,700

69
159

228

16 Financial instruments
Details of financial risk management and interest rate policies are contained in the
Directors report.
(a) Currency exposure
Net monetary assets and liabilities of the Company that are not denominated in the
local functional currency are as follows:
Net foreign currency monetary assets and (liabilities)
2001
000
(1,688)

Irish punt

20

Pearson Education Limited 2002

2000
000

17 Subsidiary undertakings
At 28 April 2001 the Company had nine wholly owned subsidiary undertakings as
follows:
Issued Ordinary
share capital

2
2
2
2
2
2
2
2
2

Carpet Depot Limited

Carpetright of London Limited
Harris Beds Limited
Harris Carpets at home Ltd
Harris Carpets Limited
Harris Carpets Direct Limited
harriscarpetsdirect.com Limited
Harris Furnishings Limited
Premier Carpets Limited

Country of
incorporation
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain

Each subsidiary undertaking has never traded and is dormant for Companies Act
purposes. Given the immateriality of these undertakings, group accounts have not
been prepared.
18 Contingent liabilities
There were no contingent liabilities requiring disclosure at the year end (2000: nil).
19 Pensions costs
The Company operates a pension scheme providing benefits based on final
pensionable pay. The assets of the scheme are held separately from those of the
Company, being invested in a Managed Fund operated by the Clerical Medical
Investment Group. The contributions are determined by a qualified actuary using the
projected unit method. The most recent actuarial review was at 6 April 1999 when
the market value of the fund was 3,154,536 excluding the value of any Additional
Voluntary Contributions and at which date the actuarial value of the assets
represented 106% of the benefits accrued to members after allowing for expected
future increases in earnings. The assumptions which have the most significant effect
on the results of the valuation are that the yield on the fund exceeds salary
increases by 2% per annum and that immediate annuities can be bought at rates
with an underlying interest rate of 8%. The pension charge for the year was
348,379 (2000: 294,277). The contributions of the Company and employees were
12.6% and 5% of earnings respectively. Contributions totalling 38,005 (2000:
36,657) are included in creditors and have been paid to the fund since the year
end.
In addition, the Company also operates a defined contribution pension scheme
which employees have the right to join on request after fulfilling the eligibility
conditions. Contributions are made by the employees which, up to an upper limit,
are matched by the company. The assets of the scheme are held separately from
those of the Company and are invested by the National Provident Institution. The
contribution by the Company for the year was 354,625 (2000: 280,382).

21

Pearson Education Limited 2002

Contributions totalling 68,958 (2000: 56,537) are included in creditors and have
been paid to the scheme since the year end.
20 Reconciliation of operating profit to net cash inflow from operating
activities
2001
000
44,677)
8,147)
(6,187)
(745)
12,940)
58,832)

Operating profit
Depreciation
(Increase)/decrease in stocks
Increase in debtors
Increase in creditors
Net cash inflow from operating activities

2000
000
36,853)
7,547)
670)
(1,039)
3,089)
47,129)

20 Related parties
Related party transactions which require disclosure are detailed in the Directors
Report.
This case study is reproduced with permission of Carpetright plc.

22

Pearson Education Limited 2002

Gadabout Travel Ltd

Gadabout Travel Ltd (GT) organises holidays abroad for UK clients. The company
charters planes and books hotels. The charter arrangements are such that the air
operators include all UK transport costs, airport charges and so on in the charter
price. The contracts with the hoteliers require them to deal with all local
arrangements, including transfers from airports to hotels and local activities where
these are a feature of particular holidays. All holidays are booked by clients and
paid through UK travel agents. By having to deal only with airlines, hotels and travel
agents, GT is able to be administratively streamlined and, its management believes,
efficient and price-competitive.
GTs holidays are of two types: summer beach holidays and winter sports
holidays. The company charges a flat rate for all holidays, distinguishing only
between the beach holidays and the winter sports ones. An unusual feature of GTs
holidays is the fact that full payment must be made with booking. Although this is
unusual, GT is able to sustain this policy by being very price-competitive. The
management believes that any possible loss of custom through following this policy
is outweighed by the knowledge that bookings, once made, are certain from the
companys point of view.
Further information about the company and forecasts for next year are as
follows:
(i) Travel agents deduct a 10 per cent commission from the full price of each
holiday before remitting the other 90 per cent to the company at the time of
booking.
(ii) Winter sports holidays have a cost to the customer of 350 each and beach
holidays cost 300 each.
(iii) Flights and hotel accommodation are booked by GT as soon as the booking is
received from a customer. Airline charges for both types of holiday are 100
per passenger. Hotel charges are 125 for beach holidays and 150 for winter
sports holidays. Both airline and hotel charges must be paid in the month in
which the holiday was originally due to be taken. If a holiday is cancelled by
the time that payment is due to the airline and hotels, they accept 60 per cent
of these amounts in respect of the cancelled places. Airline and hotel charges
for later cancellations have to be made in full. It is not GTs practice to make
any refunds to its clients, irrespective of the date of cancellation. The company
tends to know from experience what percentage of holidays booked is likely to
be cancelled.
(iv) At 31 December this year the company has received 660 bookings for winter
sports holidays. Table 1 shows the estimated bookings and cancellations.

23

Pearson Education Limited 2002

Table 1

Pre-Jan
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec

Holidays booked
Winter
Beach
660

700
150
740
980
120
860
40
660

450

100

80

80
70
50
110

360

400

Holidays taken
Winter
Beach
540
520
790
230

Holidays cancelled
Winter
Beach

200
370
890
1,070
600

40
50
70
20

20
30
80
90
60

The Holidays cancelled columns of Table 1 show the month for which the
cancelled holiday was intended to be taken at the time of booking. Past experience
suggests that, of the holidays that are cancelled, 50 per cent will be cancelled
before payment is due to the airlines and hotels, and 50 per cent will be cancelled
later than this.
GTs outline balance sheet as at 31 December this year is expected to look as
follows:

Fixed assets
Freehold land and buildings
Equipment and furniture

210,000
57,000
267,000

Current assets
Prepaid rate
Cash

500
21,200
21,700

Current liabilities
Accrued electricity
Trade creditors (660 winter sports (350
10%))

1,500
207,900
209,400
(187,700)
79,300)
79,300)

Share capital and reserves

(v) Salaries at GT will be 20,600 for each month of the ensuing year. These will
be paid during the month in which they are incurred.
(vi) Electricity is expected to be the same as this year at about 1,500 each
quarter, payable on 1 January, 1 April, and so on.

24

Pearson Education Limited 2002

(vii) The business rate is also expected to be the same as this year at 2,000 in
total, payable in two equal instalments on 1 April and 1 October.
(viii) Repairs are expected to cost about 100 each month, payable in the month
concerned.
(ix) Depreciation is to be charged at the rate of 20 per cent on the book value of
the equipment and furniture. No depreciation is to be charged on the building.
(x) Staff will incur costs for travelling on behalf of the company. These are
expected to be at the rate of 3,500 each month during the months when
holidays are being taken by clients. During each of the other three months, the
figure will be 500.
The company has always adopted the policy of realising the profit on a particular
holiday in the month in which it is taken.
Required:
Prepare a month-by-month cash budget and a budgeted profit and loss account,
both for next year, and a budgeted balance sheet as at the end of next year. You
should also make some comments on the companys plans and on the policy of
waiting until holidays have been taken, or were due to be taken, before realising the
profit on them.

25

Pearson Education Limited 2002

4 Pace Leisurewear (2)

(Contributed by John Boston)

"Why is it that the money men undo all our good work?" asked Jill Dempsey,
despairingly. Mike Greaves, the Production Director of Pace Leisurewear, decided it
was best not to reply to her question: Jill had a lot of reason to be unhappy following
the appointment of Peter Drake as a "company doctor" one month earlier.
Peter had been approached by Pace Leisurewear at the end of February in order to
suggest a plan of action to improve the company's financial position, and events had
then moved quickly. Peter was the senior consultant in Drake Management
Consultants, who specialise in helping businesses with financial problems, and had
been approached following some very difficult discussions with the company's
bankers and the largest shareholders, the Keeble brothers. The bank had insisted
that the company reduce its overdraft, which was 4.25 million at the end of
December, and had written to the company in February requesting that the overdraft
be halved by the end of June. At a board meeting at the end of February Jill wanted
to continue to wrangle with the bank over its demands, which she felt to be
unreasonable because the company was growing fast and producing large profits
(2.926 million after tax for the year to 31st December, up from 1.248 million the
year before). However, David and John Keeble had decided that the company
needed to introduce some outside expertise in order to turn the company round, and
had looked to Drake Management Consultants firstly for advice and then, following
their report, to Peter Drake himself to take an executive role. The Keeble brothers
knew that Pace Leisurewear, whilst having a very talented designer of fashion
clothes (Jane Barker, the Design Director) and experienced Marketing and
Production directors (Jill Dempsey and Mike Greaves respectively), did not have the
level of financial expertise that it required. They saw that Peter Drake was an expert
who would be supported by both the company's bankers and the auditors, and they
told the board that the company needed to sort itself out financially, and it could not
continue to test the patience of the bankers, who had already been faced with
broken promises from Pace Leisurewear, and had granted a loan to the company of
6.6 million, in addition to the overdraft.
Peter Drake made some big changes within the first month. He had a close look at
both stock and debtors, with the intention of freeing up as much cash as possible,
and started to implement policies to reduce working capital. He found it necessary to
make provisions against some of the old stock items (mainly items from last year's
fashions) which totalled 1.3 million, and he wrote off 600,000 of debtors when it
was realised that two large customers were in liquidation. He stated an intention that
Pace Leisurewear should work towards an ideal position where production would be
undertaken only on receipt of an order (with deposit) and where deliveries would be
made on receipt of cash, citing the transient nature of the "rag trade" for these tough
policy aims.
Jill Dempsey did not like the appointment of Peter Drake, especially as she was the
most visible casualty of his reorganisation. She had been the Managing Director as
26

Pearson Education Limited 2002

well as Marketing Director, but was now only Marketing Director. Peter took over the
Managing Director's responsibilities, along with overseeing financial matters, which
were previously looked at by Mike Greaves, who had been advised by the auditors
when they did their annual audit. Jill didn't trust Peter Drake when he said that all of
the team should keep their areas of expertise, and felt he was out to sack her. She
was also very angry by his insistence that the 800,000 dividends that were
proposed but not paid at the February meeting should be cancelled: she would have
received nearly 39,000 if these had been paid, and was now having to abandon
her plans to move into the lovely big house that she had been wanting to buy for
several years because she could no longer afford it - thanks to him. He didn't even
know the fashion industry: she knew that customers demanded credit, and would
purchase elsewhere if the company would stop giving any credit. But the worst of his
decisions were the two write offs, which took the company to a loss of 1.404 million
for the quarter. "He's only been here a month, but we're now making our first ever
loss - and he's charging us 25,000 a month to screw it up", she fumed to anyone
who would listen.
Not that many did listen to her any more. Mike seemed almost relieved to
concentrate only on production. Jane Barker, the only other executive director, was
really only interested in her designs, and the Keeble brothers, who between them
held 1 million shares in the company, were too busy with their other business
interests to do any more than agree to whatever Peter suggested in his frequent
telephone briefings, it seemed to Jill. She felt let down by the brothers, too: she had
known them for years and they had encouraged herself and Mike to risk all their life
savings and start up the company, but they had said in February that they wanted to
sell their shareholding as soon as the company's prospects improved. Where was
their loyalty?
Jill decided that she would demand the sacking of Peter drake when the Board met
in a couple of days. On the agenda were two topics: the plans for the next three
months and the figures for the three months to the end of March, which show the
loss. She added a third - to debate the retention of Peter Drake.

Requirement:
1.

You are to prepare the Profit and Loss Account for the quarter to March,
along with the Balance Sheet at the end of March, a statement showing in
simple terms the cash movements of the period, and an analysis of the
results.
(Appendix 1 contains the opening Balance Sheet and last year's Profit and
Loss Account, along with any other necessary information for the three
months to March).

2.

You are to prepare also the projected financial statements for the quarter to
June, based on the assumptions in Appendix 2, and to provide an analysis of
the expected performance of both the company and Peter Drake.

27

Pearson Education Limited 2002

Appendix 1

Balance Sheet as at last 31 December

000

000

5,820
3,744
402
0
8

9,974

Fixed assets
Current Assets
Stock
Debtors
Other debtors
Cash at bank
Cash in hand
Creditors: amounts falling due
within 1 year
Trade creditors
Other creditors
Taxation
Dividends
Bank overdraft
Net Current Assets

2,612
402
780
800
4,250

Creditors: amounts falling due

after 1 year
Loan capital

8,844
1,130

000
14,470

1,130
15,600
6,600
9,000

Capital and Reserves

Ordinary shares of 0.50 each
Retained profit

3,600
5,400
9,000

28

Pearson Education Limited 2002

(i) Profit and Loss Account for the year ended last 31st December

Turnover
Cost of Sales
Gross Profit
Operating expenses
Operating profit (before interest and taxation)
Interest payable
Profit before taxation
Taxation
Profit after taxation
Proposed dividend
Retained profit for the year
Retained profit brought forward from previous
year
Retained profit carried forward

29

Pearson Education Limited 2002

000
22,410
11,618
10,792
6,174
4,618
912
3,706
780
2,926
800
2,126
3,274
5,400

Further information relevant to the three months to 31st March

(All numbers are in 000s)
Sales for the quarter were 6,300, and all were on credit
Cash receipts from debtors totalled 5,804
Debtor write-offs totalled 600
Purchases of stock totalled 2,800 (all on credit), and 2,790 was paid to creditors
Stock write-offs totalled 1,300
Cost of Goods Sold totalled 3,600
Operating expenses (excluding depreciation) were 900, all of which were paid
immediately as incurred. This figure includes 25 for Peter Drake's salary for March.
The depreciation expense was 904. There were no purchases of fixed assets, nor
any disposals.
Interest expenses for the period were 400
Other debtors, other creditors and cash in hand remained constant. The taxation
was not due to be paid until September.
The Board decided in February that no dividends regarding the previous year would
be paid The net loss for the quarter was 1,404

Appendix 2
Further information relevant to the three months to 30th June
(All numbers are in 000s)
Sales for the quarter will be 6,300, and all will be on credit
Cash receipts from debtors will total 6,650
Debtor write-offs will total 150
Purchases of stock will total 2,160 (all on credit), and 2,110 will be paid to
creditors
There will be no stock write-offs
Cost of Goods Sold will total 3,600
Operating expenses (excluding depreciation) will 875, all of which will be paid
immediately as incurred. This figure excludes Peter Drake's salary for the quarter.
The depreciation expense will be 904. There will be no purchases of fixed assets,
nor any disposals.
Interest expenses for the period will be 278
Other debtors, other creditors and cash in hand will remain constant. The taxation is
not due to be paid until September.

30

Pearson Education Limited 2002

5 Landlord: investment appraisal

(Contributed by John Boston)

You have recently graduated from university and have a job with an annual salary of
20,000. You have also just inherited 20,000 from your grandmother, Granny Elsie,
who stipulated in her will that you must use the money to invest in a project that will
provide a good return, and which will help secure the financial
future of you, her favourite grandchild. After much thinking you have decided to buy
a house in the city of your university which you will rent out to students and for
which you will handle all the administration and repair work, as you are planning to
stay in the city for the foreseeable future, and happen to be competent at most
straightforward repair work that would be necessary to maintain a house. For the
purposes of this case study you can assume that you have already got suitable
accommodation for yourself, and will not be planning to move into the property that
you buy.
You have contacted the banks and building societies and realise that you will be
able to borrow up to three times your annual salary, but will have to pay interest at
half of one per cent above their normal variable mortgage rate due to the increased
risk which follows from renting out a property. You do not have to
borrow the full amount, and will be happy to borrow less than this maximum level if
you find you have no need for it.
You have contacted the universitys accommodation office, who tells you that
students want to rent properties close to the university, but who does not specify to
you the best areas for renting to students. She tells you that students are looking to
rent good quality properties, and that the property you rent should, ideally, be
classed by the accommodation office as A grade. She does not tell you the
requirements of an A grade, except that the property must be structurally sound
and be in good condition. She does not specify the rental that you would be able to
charge, nor the number of weeks a year for which rental will be
receivable, but does agree that your property can be placed on their register free of
charge. It is expected that a good property, in the right location, will be desired by
students, and that you should be able to rent all the rooms.
The city council inform you that fire regulations apply to properties of three floors or
more, but not to properties of two floors or less. Given that the fitting of fire doors,
escape ladders, etc. will be extremely expensive, you decide to limit your search to
properties for which the regulations will not apply.

31

Pearson Education Limited 2002

You will want to find a property that is structurally sound, although you are willing
and able yourself to redecorate throughout the property before renting commences.
If you see a property requiring structural work, you estimate that the following costs
apply:
Re-roofing
Electrical rewiring
Installation of gas central
heating
Replacement of all windows
and doors

3,000
2,000
3,000
2,500

Assume that no other type of structural work would possibly be required; if a

property required more than this it would not be suitable for purchase.
If you purchase a property for 60,000 or over stamp duty will be payable
immediately to the government at 1 per cent of the full purchase price; if the
purchase price is less than 60,000 no stamp duty will be payable.
You estimate that providing necessary furniture and fixtures and fittings will cost
5,000. You reckon on spending 700 on legal fees and 400 on survey costs
before you make a purchase, which you anticipate will occur in June in order that
you will have the property ready for viewings in August prior to letting
commencing in September.
You are to assume that you will rent the house out for 10 years, at the end of which
you will sell the property for the purchase price paid (including the structural work
performed) plus the growth of 1 per cent each year, this reflecting the anticipated
increase in property prices over the period. Deduct from the sales figure 2 per cent
of the final sales price achieved, which will be the selling agents charge.
Annual costs will include insurance at 300 and repairs at 1,000.
Required:
You are to prepare an appraisal for a suitable property using the information above,
making any assumptions that you consider reasonable. This will be presented along
with a brief summary report and evidence supporting your assumptions see details
from your lecturer.
You will need to:
1. Identify a property that is currently on the market (hint: estate agents will give you
property details, and your local paper will have a property feature once a week)
and estimate the required structural works.
2. Consider the amount of rent receivable each year. This assumption is to be
backed up with appropriate evidence such as examples of rental agreements
that illustrate any relevant terms and conditions, the location of the property and
the number of lettable rooms.
3. Assume that the revenues and costs identified in your first year will not change
with inflation (or otherwise) during the 10-year period.
4. Ignore taxation (including MIRAS relief), water rates and Council Tax.
32

Pearson Education Limited 2002

5. Assume that a normal variable rate mortgage is charged at a rate of 1 per cent
above the base lending rate.
6. Show the sensitivity of the appraisal to changes in the variable mortgage interest
rate.
7. Provide appropriate evidence to support your assumptions.

33

Pearson Education Limited 2002

6 Blue Hills Country Park

(Contributed by Graham Clayton)
Blue Hills Country Park is a large leisure park situated in North Devon. It opened in
Year 0 and offers a wide range of indoor and outdoor amusements for children (and
indeed many parents) of all ages. Thus family groups are a prime market for the
park. Blue Hills is owned and run by the Palmer family and has been built on land
previously used for dairy farming. Jenny Palmer is the managing director of Blue
Hills Country Park Ltd (which has a trading year end of 31 December). Her husband
and father-in-law are fellow directors, but most of their time is spent running the
family farm which adjoins the park.
It is now September Year 5 and Jenny has returned recently from a trip to Florida
where at the Everglades Fun Park she saw the Olympic Slide in operation. This is a
dry slope toboggan run. Customers sit in small plastic toboggans, are winched up to
the top of a hill and then run at some speed down an aluminium track back to the
start of the ride. She was impressed by the rides popularity (there were large
queues throughout the day) and is convinced that it would be equally popular at
Blue Hills. She has spoken to the management of Gulf Stream Industries Inc. (the
manufacturer and patent holder of the Olympic Slide) and has a verbal agreement
with them that she could open (with a different name) such a facility in Devon. She
plans to call the ride The Kressta Run and feels that as it would be the only one of
its kind in England, it would generate a 5 per cent per annum compound growth in
visitors to Blue Hills. Although time is short, the Run could be built by the end of
Year 5 and in operation by the start of the new year (i.e. January Year 6).
You have been asked by Jenny to advise her on the financial viability of the Kressta
Run. The following information has been made available to you:
Average visitors per day in Year 5
(including an estimate for October to December): 1,050
Number of days that Blue Hills is open to the public in Year 5: 360
Entrance fee per person (all pay the same price and the amusements are
then free): 4.00
Variable cost per visitor: 0.25
Fixed costs per quarter: 200,000
Staff employed at Blue Hills (40 of these are part-time): 55
Average expenditure per head by visitors in the cafeteria/gift shop: 2.00
Standard mark-up on cost price in the cafeteria/gift shop: 100%

34

Pearson Education Limited 2002

Details of the costs of installing the Kressta Run (all of which will attract corporation
tax allowances of 25 per cent reducing balance per annum from Year 5) are:
Landscaping of Top Field (autumn Year 5)
Aluminium track (autumn Year 5)
Cost of 60 plastic toboggans (autumn Year 5)
Conversion of barn in Top Field to be a control
centre for the Run (autumn Year 5)
Cost of winching equipment for the toboggans
(autumn Year 5)

30,000
90,000
60,000
25,000
35,000

The management of Gulf Stream have advised Jenny that the equipment will last for
four years from the start of operations. Jenny is adopting a prudent approach and
feels that the equipment will have no scrap value at the end of Year 9. Gulf Stream
will be charging Blue Hills a fixed amount of 40,000 per annum (Year 5 prices) for
four years (from Year 6) for the patent right that covers its invention.
She estimates that four extra staff will be employed to operate the Kressta Run.
They will be paid 8,000 per annum each (Year 5 prices). The annual running costs
of the Run will be (Year 5 prices):
Maintenance
Electricity
Special additional insurance cover

20,000
10,000
15,000

In addition Jenny informs you that in April Year 5 the Palmers received planning
permission for the barn in Top Field. This would cost 5,000 to convert and,
according to Jenny, there is a local couple interested in buying the converted
property at a price of 35,000 (Year 5 prices). The earliest date that the conversion
and sale would be completed is the end of Year 6. (Ignore all tax implications of this
property.)
There are no plans to increase the entrance fee to Blue Hills in the foreseeable
future. However, staff costs and running costs (maintenance, electricity, insurance)
are expected to rise by 4 per cent per annum from the start of Year 6.
Required:
Advise Jenny Palmer as to whether she should proceed with this venture. You
should assume, in the first instance, that Blue Hills Country Park Ltd would use a
money cost of capital of 7 per cent. (You should use a corporation tax rate of 25 per
cent throughout and note that the tax is payable 12 months after the end of the
relevant trading year.) Would your advice to Jenny change if any of the following,
mutually exclusive situations arose:
(i) visitor growth (compound) per annum was 3 per cent rather than 5 per cent, or
(ii)the annual inflation rate for staff and running costs was 7 per cent rather than 4
per cent, or
(iii)
management used a money cost of capital of 10 per cent rather than 7 per
cent.

35

Pearson Education Limited 2002

You are advised to construct a spreadsheet model to aid you with this exercise. If
you can get the model to work properly then you clearly understand the
interrelationships (and effects) of all of the information given in the case.

36

Pearson Education Limited 2002