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APC308 Financial Management - Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part of dividend policy.

APC308 Financial Management

Weighting – 100% of the marks for this module

This is an individual assignment of 3,000 words. (+ or – 10%)

Students are required to submit their assignments through Turnitin on Canvas and JIRA for marking. Only assessments submitted through Canvas and JIRA will be marked.

Requirements:

You must answer any TWO questions. Each question that is attempted will carry a maximum mark of 50%

Question 1 – Dividend Policy

Deciding how much earnings to retain and how much to return to ordinary shareholders is a key part of dividend policy. Drawing on the dividend policy literature critically discuss some of the factors that need to be considered by senior managers of a listed company when deciding on:

a) the size of the annual dividend to return to its shareholders (12 marks)

b) and the practical issues that need to be considered when deciding on the size of the dividend payment. (12 marks)

Squeezeco is currently deciding on the level and form of its next dividend. It is considering three options:

  1. A cash dividend payment of 15p per share
  2. A 5% scrip dividend
  3. A repurchase of 15 % of ordinary share capital at the current market price

Extracts form the company’s financial statements are given below

£m

£m

Operating profit

24.5

Taxation

7.8

Distributable earnings

16.7

Non-current assets

Current Assets

75

Trade receivables

24

27 Inventory

Cash

46                    97

Total Assets

Equity Finance

172

Ordinary Shares (50p)

26

Reserves

108                     134

Current Liabilities

38

Total liabilities

172

c)  If the current cum dividend share price is 432p, calculate the effect of the three options on the wealth of a shareholder owning 1250 shares in Squeezeco. (16 marks)

d) Critically discuss how the company’s decision will be influenced by the opportunity to invest

£70m in a project with a positive net present value. (10 marks)

Total (50 marks)

Question 2 – Mergers and Takeovers

The managing directors of Aztec are considering what value to place on Trojan plc, a company that they are planning to take near in the near future. Aztec’s plc’s share price is currently £3.89 and the company’s earning per share stand at 21p. Aztec’s weighted average cost of capital is 9%.

The board estimates that annual after tax synergy benefits resulting form the takeover will be £4.35m, that Trojans’ distributable earnings will grow at an annual rate of 2% and that duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing at 20%), in a years time.

Information relating to Trojan plc.:

Financial Statement of Trojan plc

 

£m

Non-current assets

270

Current assets

56

Total assets

Equity

326

Ordinary Shares (£1)

147

Reserves

64

211

7% bonds

72

Current liabilities

43

Total liabilities

326

Statement of profit or loss extracts

£m

Profit before interest and tax

64.0

Interest payments

6.5

Profit before tax

57.5

Taxation

17.1

Distributable earnings

40.4

Other information:

Current ex-div share price

£2.05

Latest dividend payment

13p

Past four years dividends payment

10p, 10.5p, 11p, 12p

Trojan’s equity beta

1.1 %

Treasury bill yield

5%

Return on the market

11%

Given the above information calculate the value of Trojan plc using the following valuation methods:

a)  Price/earnings ratio    (10 marks)

b)  Dividend valuation method   (10 marks)

c)  Discounted cash flow method  (10 marks)

d) Drawing on the mergers and takeovers literature, critically discuss the problems associated with using the above valuation techniques and based on this which of the above you would recommend the board of Aztec to use. (20 marks)

Question 3

Lovewell Limited 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 Lovewell Limited 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: a. The Payback Period.
    1. The Accounting Rate of Return.
    2. The Net Present Value.

d.  The Internal Rate of Return (to two decimal places) (20 marks)

2.  Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques. (30 marks)

Table 1 Applied Penalties for Exceeding the word count.

Word limit

Penalty

Actual Word Count

Exceeds limit by up to 10%

No penalty – tolerance band (see below)

3300

Exceeds limit by 10.1-20%

-5%

3301 – 3600

Exceeds limit by 20.1-30%

-10 %

3601 - 3900

Exceeds limit by 30.1-40%

-15 %

3901 - 4200

Exceeds limit by 40.1-50%

-20 %

4201 - 4500

Exceeds limit by more than 50%

Mark of zero

4501+

The learning outcomes for this module assessed by this piece of work are

Knowledge

  1. Examined and critically evaluated the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.
  2. A critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level
  3. A critical understanding of the limitations of the current state of financial theory in making strategic business decisions

Skills

  1. Applied the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organisation

Assessment Criteria

Your seminar tutor on the basis of the following generic criteria will assess the paper:

Assessment Regulations For further information regarding Assessment Regulations, extenuating circumstances or extensions and academic integrity, please refer to your Programme Handbook on the University of Sunderland in London information page on Canvas.

Reading List

Please access your reading list from the library website. To access it, please go to https://moduleresources.sunderland.ac.uk/ and search for your module

Submission guidelines

Your submission link will become available approximately 3 weeks prior to your submission deadline, along with detailed instructions on how to submit your assignment.

Grading

You will be marked in accordance to the University of Sunderland assessment criteria attached below. The assessment criteria covers; Relevance, Knowledge, Analysis, Argument and Structure, Critical Evaluation, Presentation, Reference to Literature.

You need to work from considering the first learning outcome which is: Examined and critically evaluated the key strategic decisions that a business may have to make and appreciated how accounting and finance can assist in making and evaluating those decisions.

APC308 Financial Management


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