Apply horizontal analysis and vertical analysis and perform ratio analysis (for both fiscal years 2019 and 2020). Based on the results of your analysis, critically comment on the firm’s financial status

FIN3020 Module Assessment (Weight 100%)

Case Study

Midox Ltd is a retailer of organic grocery operating in London. The company started up 4 years ago and has been growing since then.

The demand for low calorie, lower fat and organic food is influenced by the rising awareness of maintaining healthy diet. Midox Ltd seeks to fulfil the growing demand of this market. Midox Ltd acquires the fresh groceries from local farmers, packages and delivers their final products directly to end customers. The expansion of the business is limited to the company’s storage capacity and delivery radius. To expand the business, the directors are considering to rent a new warehouse in a different location than the existing warehouse to cover areas and reach new potential customers. The plan requires purchasing delivery vehicles, equipment and hiring more employees.

The proceedings below are extracted from the meeting held between Neil, the founder of Midox Ltd, and Ellen, the marketing director.

Neil: “Update me on the outcome of the market research that you have conducted.”

Ellen: “As for sales of the new project, we expect to deliver 60 packages daily in the first year (2022) but this will increase to 100 packages in 2023 and to 120 packages in 2024.”

Neil: “what about projected sales beyond 2024?”

Ellen: “We will apply forecasting techniques to estimate future sales.”

Neil: “I suggest that we apply both the weighted moving average forecast model and the Exponential smoothing model. Using the predicted sales of 2022 to 2024, we should be able to forecast a projection of sales up to 2028.”

Ellen: “And I have also estimated our cost of goods sold using the historical analogy method. These include the cost of products, packaging and wages. Quotes for other expenses including rent, utilities and insurance premium were obtained from the relevant suppliers.”

Neil: “I want you to work with our freshly graduate employee that we recently hired to prepare a financial analysis of our financial statements. This is key to obtain a loan for the new project. Also run a break-even analysis and evaluate the new project using capital budgeting techniques and have everything ready in 2 weeks.”

Cost analysis:

The grocery box  made by Midox Ltd contains organic vegetables and cooking ingredients. The supplies are obtained from different farmers including regional small growers and then apportioned into meal-size boxes. The cost of the food per box is estimated to be £3.6 and the cost of packaging is £0.4 per box. The price per unit of the grocery box is £10. Midox attempts to serve customers within a 3-mile radius to maintain bearable delivery costs. A driver can deliver on average 4 packages within an hour and the driver’s wage is £12/hour. Midox operates 6 days a week.

The rent for the new warehouse is £3500 per month and is set fixed for the whole project’s life. Insurance premium for the additional vehicles amounts to £3300 per year. Changes in the insurance premium is very trivial and therefore they are expected to remain unchanged for the life project. Utilities bills were estimated to be £2000 for the year 2022 and would increase annually by 2%. Other administrative expenses include employing a full-time warehouse manager whose salary would be £24000 a year.

Neil will be investing an amount of £30,000 from his savings to purchase extra vehicles and to set up the new warehouse. The acquired assets, vehicles and warehouse equipment, will be depreciated at 15%. The business tax rate is 19%. WACC for Midox Ltd is estimated at 14%. The working capital required for supporting the business operations is 10% of Sales and is needed at the beginning of the fiscal year.

The financial statements for fiscal year ending 2019 and 2020 are provided below:

Midox Balance Sheet
Fiscal Year Ended	Dec. 31, 2020		Dec. 31, 2019
Assets
Current assets:
Cash and cash equivalents	36200		26800
Accounts receivable, net	2061		1750
Inventories	5408		7747
Total current assets	43669		36297
Property, plant and equipment, net	95200		97200
Total assets	138869		133497
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	31500		28670
Accrued taxes	5900		2800
Total current liabilities	37400		31470
Long-term debt	31076		30620
Total liabilities	68476		62090
Shareholders’ equity:
Common Stock	38000		38000
Retained earnings	32393		33407
Total shareholders’ equity	70393		71407
Total liabilities and shareholders’ equity	138869		133497

 

Midox Statement of Earnings
Fiscal year ended:			Dec. 31, 2020	Dec. 31, 2019
Sales			420000	342000
	Returns		620	700
Total Net Revenues			419380	341300
	Cost of Sales		231000	193000
Gross Profit			188380	148300
	Insurance		6800	6500
	Rent		30000	30000
	Utilities		3155	2900
	Depreciation		2000	2000
	General & admins expenses		76400	56000
	Subtotal operating expenses		118355	97400
Operating income			70025	50900
Interest expense			3440	3150
Earnings before taxes			66585	47750
Income taxes			12651	9073
Net Earnings			53934	38678

Requirements:

a) Apply horizontal analysis and vertical analysis and perform ratio analysis (for both fiscal years 2019 and 2020). Based on the results of your analysis, critically comment on the firm’s financial status. (20 marks)

b) Perform a break even analysis for the newly proposed project using estimates of prices and costs of the fiscal year 2022. How many grocery boxes should be sold every day to break even? Illustrate your answer using a graphical representation of the break-even analysis. Calculate the break-even Sterling amount. Calculate the degree of operating leverage. Comment on your findings in relation to the forecasted daily sales provided in the conversation above. (20 marks)

c) Using the weighted moving average forecast (MAF) model, project the future sales of the new project for years 2025 up to 2028. The weights for the MAF are 0.6, 0.3 and 0.1 for years, 2022, 2023 and 2024, respectively. Apply the exponential smoothing model choosing a smoothing constant of your own and using an assumed forecast equal for 2025. Justify your choice of the smoothing factor and assumed forecast. (20 marks)

d) Perform a projection of the future cash flows for the new project. Investment will be made in 2021 and the project is set to start operating in 2022. Cash flows should be projected up to 2028. Estimate the net cash flows using the forecasted variable and fixed costs. Apply the NPV, Payback period and IRR capital budgeting techniques. Should we accept the project? Assume that the desired payback period is 5 years from the beginning of the project. (35 marks) 

Structure and clarity of the report. (5 marks)

You are required to submit a report detailing the methods used in each part and the results of your estimations. You are also required to submit an Excel file illustrating your working.