You are a financial analyst at Smithson Plc; a public limited company specialising in manufacturing and distributing office furniture. The Board of Directors have looked into the financial statements of the company for the last two years and have raised a concern about the company’s profitability and liquidity. The financial statements of Smithson for the last two years are given below

Part A      

Smithson Plc2

You are a financial analyst at Smithson Plc; a public limited company specialising in manufacturing and distributing office furniture. The Board of Directors have looked into the financial statements of the company for the last two years and have raised a concern about the company’s profitability and liquidity. The financial statements of Smithson for the last two years are given below:

Profit and loss account for the year ended 31 December

	2013		2012
	£000	£000	£000	£000
Sales		13,850		12,500
Cost of sales:
Opening stock	275		200
Manufacturing costs	6,980		5,250
Closing stock	425		250
		6,830		5,200
Gross profit		7,020		7,300
Selling and distribution expenses	2,700		1,450
Administrative expenses	1,750		1,500
Bad debts written off	425		150
		4,875		3,100
Operating profit before interest and tax		2,145		4,200
Interest payable		550		350
Profit before tax		1,595		3,850
Income tax		595		1,270
Profit after tax		1,000		2,580
Dividends paid		120		80
Retained profit for the year		880		2,500

Balance sheet as at 31 December 

	2013		2012
	£000	£000	£000	£000
Property, plant and equipment (net)
Land and building		3,450		3,200
Equipment		3,000		2,350
Motor vehicles		1,300		650
		7,750		6,200
Current assets
Cash	-0-		350
Stock	500		275
Trade debtors	4,900		2,600
Current liabilities
Trade creditors	2,800		2,100
Other creditors (including taxation)	500		400
Bank overdraft	300		-0-
Net current assets		1,800		725
		9,550		6,925
Non-current liabilities
Loan capital		3,900		2,400
		5,650		4,525
Equity
Ordinary shares of £1 each		3,845		3,600
Retained profit		1,805		925
		5,650		4,525

 

 

Required:

 

• Prepare a report for the Board of Smithson Plc. that evaluates the performance of Smithson in relation to profitability, liquidity, gearing and asset utilisation. Your report must be supported by the calculation of relevant ratios in the four evaluation areas mentioned above                                                 (25%)

 

• Calculate the Working Capital Cycle in days for Smithson Plc based on the information above, assuming 365 days, for the years 2013 and 2012 AND briefly comment on the company’s liquidity position in 2013 compared to 2012. (round to the nearest day)                                                             (5%)

 

All calculations should be clearly shown and should be made to the nearest £000.

 

Total for part A: 30%

 

 

 

 

Part B : Jones Ltd

 

Jones Ltd. a food manufacturer is considering purchasing a new machine for £275,000. The company is expecting an annual cash inflow of £85,000 from the sale of products and an annual cash outflow of £12,500 for each of the six years of the machine’s useful life. The annual cash outflows do not include annual depreciation charges for the machine. The machine is depreciated using the straight-line method. The machine is expected to last for six years, with a residual value estimated to be at the rate of 15% of the original cost of the machine. The cost of capital for Jones Ltd. is 12%.

 

You are required to:

 

1. Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine:

 

1. The Payback Period.
2. The Accounting Rate of Return.
3. The Net Present Value.
4. The Internal Rate of Return (to two decimal places) (15%)

 

2. Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques. (20%)

 

Total for part B: 35%

 

Part C

 

Explain and critically evaluate

1. The main sources of finance available to business and the advantages and disadvantages of such finance. (20%)
2. Analyse and critically evaluate the break-even assumptions in relation to the reality of today’s business environments. (15%)

 

Total for part C: 35%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes:

 

1. To obtain a high mark, you should:

1. Make your report concise, precise and well presented and structured;
2. Draw logical conclusions from accounting information;
3. Synthesise information in a coherent and useful way;
4. Show evidence of key text and background reading;
5. Incorporate your knowledge into an integrated piece of work;
6. Demonstrate critical understanding of financial management.

 

1. A Harvard standard referencing is required for the report

 

 

 

3,500 words overall. (plus or minus 10%)