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1. Contrast the appropriateness of the different sources of finance to a business | FIN4001 Introduction to Finance Assignment

FIN4001 Introduction to Finance Assignment

Assignment Brief

As part of the formal assessment for the programme you are required to submit an Introduction to Finance assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

Learning Outcomes:

After completing the module, you should be able to:

1. Contrast the appropriateness of the different sources of finance to a business.

2. Explain the implications of finance as a resource within a business.

3. Produce simple financial statements in accordance with accepted principles.

4. Use financial information for decision making purposes.

5. Demonstrate a confident use of the financial terminology and conventions in communicating results.

Your assignment should include: a title page containing your student number, the module name, the submission deadline and a word count; the appendices if relevant; and a reference list in Arden University (AU) Harvard format. You should address all the elements of the assignment task listed below. Please note that tutors will use the assessment criteria set out below in assessing your work.

You must not include your name in your submission because Arden University operates anonymous marking, which means that markers should not be aware of the identity of the student. However, please do not forget to include your STU number. Maximum word count: 3,000 words Please note that exceeding the word count by over 10% will result in a reduction in grade by the same percentage that the word count is exceeded

Assignment Task

Question 1

You are the Chief Financial Officer at Touchdown Sports Inc., a leading manufacturer of protective equipment for use in contact sports. The company manufactures a range of products, including shoulder pads for use by players of American football.

These pads comprise a hard plastic shell with foam padding underneath, metal rivets and elastic straps. Touchdown Sports Inc. sells all of its products to retailers on a credit basis. Estimated annual usage of hard plastic in Touchdown Sports Inc’s manufacturing process is 27,000 kilograms. This is used evenly throughout the year other than during July and August, when production increases to meet demand due to the start of the American football season in September, and during November, when production increases to meet demand prior to the Christmas holiday in December. Inventory holding costs for hard plastic are estimated to be $1.75 per kilogram per year. The estimated cost of placing and processing each order of hard plastic is $14.

Throughout the year, it is estimated that hard plastic will cost an average of $0.90 per kilogram. However, forecast fluctuations in demand mean that the cost of hard plastic could vary from a maximum of $1.90 per kilogram and a minimum of $0.75 during the year. Touchdown Sports Inc. imports hard plastic from Guangzhou Productions plc, China. Recent disputes with this supplier have led Touchdown Sports Inc. to maintain a ‘buffer’ inventory to manage the risk of disruption to this supply. Guangzhou Productions plc offers a 7.5% bulk purchase discount on orders of hard plastic of 10,000 kilograms or more.

The company’s approach to inventory management was discussed at a recent meeting of Touchdown Sports Inc’s senior executive team. Grace Rodriguez, Chief Executive at Touchdown Sports Inc., is an advocate of just-in-time (JIT) inventories management. Grace has questioned the company’s current approach to the management of its inventory of hard plastic and has commented:

Holding inventories results in costs for the company. We could avoid these costs if we introduce a JIT approach to the management of our inventory of hard plastic. Inventories management models and information technology are available to help us. Maria Cousins, Chief Operating Officer at Touchdown Sports Inc., has pointed out that the successful management of inventories involves a number of practical issues. Maria has commented: Inventories management models and information technology are useful, but I am sure that there are other issues that we need to consider. I would like to know more about the practical implications of managing inventories.

Required:

(a)  Calculate the economic order quantity (EOQ) for hard plastic.

(5 marks)

(b)  Calculate the total annual cost of hard plastic.

(4 marks)

(c)  Critically evaluate Touchdown Sports Inc’s decision to use the EOQ model as part of its approach to the management of inventories.

(5 marks)

(d)  Advise Touchdown Sports Inc’s senior executive team on the comments made by Grace Rodriquez and Maria Cousins. Your advice should include an explanation of the costs of holding inventories, the costs of failing to manage inventories properly and the practical implications of managing inventories.

(11 marks)

 

(Question 1 Total marks: 25)

(LO: 1, 2 and 4)

Question 2

You are a Senior Analyst at Eagles LLP, a major advisory and professional services firm. One of your clients is Touchdown Trips Inc., a company that provides luxury package tours to watch sports events in North America.

Touchdown Trips Inc. uses a luxury private jet aeroplane to carry clients to their destination. The company is planning to invest in a new luxury jet. Two possible investment options have been identified: the Gulfstream G650ER (option A) and the Boeing BBJ Max 7 (option B). Each option has an expected life of five years, after which the selected aeroplane will be replaced by a new luxury private jet aeroplane. Sufficient funding is available to finance only one of the options.

 

Option A

Option B

 

USD ($000

USD ($000)

 

 

 

Initial cost (year 0)

51,000

76,500

Scrap value (year 5)

40,110

60,120

 

 

 

Forecast net cash inflows

 

 

Year 1

3,200

3,900

Year 2

3.300

3,600

Year 3

3,100

3,300

Year 4

3,000

3,100

Year 5

2,900

2,600


Assume that all cash flows occur at the end of the respective year. Touchdown Trips Inc. has a cost of capital of 12 per cent.

Touchdown Trips Inc. have requested that the payback period and accounting rate of return techniques be used to support this capital investment decision. The company’s approach to investment appraisal was discussed at a recent meeting of Eagles LLP’s senior executive team. Bill Brady, Senior Partner at Eagles LLP is keen for the managers of Touchdown Trips Inc. to understand the characteristics of capital investment decisions: Bill has commented:

We need to ensure that the managers at Touchdown Trips Inc. understand the characteristics of capital investment decisions. This might lead them to accept the use of capital investment appraisal techniques other than payback and accounting rate of return.

Xiaolin Peng, Head of Asset Management at Eagles LLP, has highlighted that the internal rate of return technique may be suitable in this case. Xiaolin has commented:

Internal rate of return is the rate of return that an investment project yields, taking account of the fact that cash may be flowing in and out of the project at various points in its life. If we explain the advantages and disadvantages of internal rate of return to the managers at Touchdown Trips Inc., this might encourage them to accept the use of this techniques

Required:

(a)  Calculate the payback period for both option A and option B.

(4 marks)

(b)  Calculate the accounting rate of return for both option A and option B. Assume that the only difference between cash flow and profit is the depreciation charge.

(6 marks)

(c)  Critically evaluate the accounting rate of return technique.

(8 marks)

(d)  Advise the senior executive team on the comments made by Bill Brady and Xiaolin Peng. Your advice should include an explanation of the characteristics of investment appraisal decisions and the advantages and disadvantages of the internal rate of return technique.

(7 marks)

(Question 2 Total marks: 25)

(LO: 3, 4 and 5)

Question 3

Agro Co.’s income statement for the year ended 31 March 2019 and statements of financial position at 31 March 2019 and 2018 were as follows:

Agro Co.: Income Statement for the year ended 31 March 2019

 

 

£`000

Sales

 

3495

Cost of Sales

 

(2182)

Gross profit

 

1313

Other income: interest received

 

33

Distribution costs

 

(187)

Administrative expenses

 

(309)

Interest costs

 

(75)

Profit before tax

 

775

Income tax expense

 

(157)

Profit for the year

 

618

 

Agro Co.:

Statements of Financial Position as at 31 March 2019 and 2018

 

2019

2018

 

£`000

£`000

Non-current assets

 

 

Property, plant and equipment (PPE)

1700

1615

Intangible assets

425

375

Investments

0

95

Current assets

 

 

Inventory

150

102

Trade receivables

1010

315

Short-term investments

75

0

Cash at Bank

452

1

Total Assets

3812

2503

Current liabilities

 

 

Trade payables

289

119

Bank overdraft

143

98

Taxation

312

285

 

744

502

Non-current liabilities

 

 

Long-term loans

170

50

Total Net Assets

2898

1951

 

Equity

 

 

Share capital (£1 ordinary shares)

1950

1550

Share premium account

260

150

Revaluation surplus

70

51

Retained earnings

618

200

Total Equity

2898

1951

Required

a) Calculate for the financial year ended 31 March 2019 and, where possible, for 31 March 2018, the following ratios:

i) Gross profit margin

ii) Assets usage

iii) Current ratio

iv) Acid test

v) Inventories holding period

vi) Debt to Equity ratio

(12 Marks)

b) Critically explain the importance of considering the audience for financial statement analysis.

(13 Marks)

 (Question 3 Total 25 Marks)

 (LO: 3, 4 and 5)

Question 4

An international regulatory framework for accounting is required in order to ensure that financial statements can be relied upon and that the information within financial statements is useful and relevant.

Corporate governance is the system by which organisations are directed and controlled. Corporate governance is important because it affects how decision makers act, how they can and should be monitored and how they can be held to account for their decisions and actions.

Required:

(a)  Explain the role of each of the following organisations in the international regulatory framework for accounting: IFRS Foundation; IFRS Advisory Council; International Accounting Standards Board: IFRS Interpretations Committee. (6 marks)

(b)  Critically discuss the role of audit committees in corporate governance (19 marks)

(Question 4 Total marks: 25)

(LO: 4 and 5)

 END OF QUESTIONS


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