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FIN4001 Introduction to Finance

FIN4001 Introduction to Finance

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 available 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.

Question 1

The marketing department of Redstone plc has put forward for consideration the following capital investment project, details of which are shown below. The project being put forward has an initial investment requirement of £340,000, with inflows and outflows of £100,000 and £25,000 respectively each year for the next six years. The investment required is not readily available in the form of working capital and therefore the company would require both equity and debt financing. The equity requirement would constitute half of the investment, with the remainder through debt financing. Equity investors require a 7% return and debt financers require 6% interest. There is also an associated risk premium of 1.5% which needs to be considered. However, the Managing Director has concerns about the viability of the project and applies strict targets which must be achievable before the project can be accepted. In order to be considered the Managing Director requires a payback period of 4 years, a target accounting rate of return (ARR) of 5 per cent and a positive net present value (NPV).


a) Calculate the undiscounted payback period. (3 marks)

b) Calculate the Weighted Average Cost of Capital (WACC). (3 marks)

c) Calculate the Net Present Value (NPV) of the project, using the WACC calculated in (b) above as the discount rate. (6 marks)

d) Calculate the Accounting Rate of Return (ARR) of the project. (4 marks)

e) Drawing from the information calculated in the sections above, and taking into consideration the requirements set by the Managing Director discuss whether the project should be accepted or rejected. (9 marks)

Question 2

(a) The owner of Xstore is contemplating the way that the business is structured. At present the business is run as a Sole Trader. However, Xstore’s owner is determined to expand the business and is frustrated by her inability to access sufficient capital in order to fund this expansion. In order to raise additional funds, but still retaining control of the business, the owner is exploring alternative business structures.

Discuss two types of business structures that the owner of Xstore may wish to consider, exploring the advantages and disadvantages of each, in the context of the situation described in the question above. [12 marks]

(b) Discuss the reasons for the importance of working capital management to a business and consider why firms might adopt an aggressive working capital policy. [13 marks]

Question 3 MediaTech UK plc is a large company in the entertainment sector with retail stores in four countries selling DVDs, music and games. Income Statements for MediaTech plc for the years ending December 31 2016 and 2015 are as follows:

You are also given the following information:

1. The Statement of Changes in Equity discloses that the company paid a dividend of £29m in financial year 2016 and £27m in financial year 2015.

2. The company had 423.6m shares on issue at the end of the financial years 2016 and 2015.

3. In April 2016 the share price was £0.79. In April 2015, the share price was £1.50.

Required: (i) Calculate the following twelve ratios for both years: a. Return on Capital Employed (ROCE) b. Return on shareholders’ investment (ROI) c. Gross margin d. Operating profit margin e. Acid-test ratio f. Asset turnover ratio g. Inventory days h. Days payables outstanding i. Days receivables outstanding j. Dividend yield k. Dividend payout ratio l. Price/Earnings ratio [12 marks] (ii) Using the ratios calculated in (i) above, and any other information given in the question, provide an analysis of the financial health of the company from the perspective of: a. The management of the company [7 marks] b. The shareholders [6 marks]

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