APC308 Financial Management January 2019

Learning outcomes

Upon successful completion of this module, students will have demonstrated:

Knowledge

K1. Critical understanding of 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

K2. Critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level

K3. Critical understanding of the limitations of the current state of financial theory in making strategic business decisions

Skills

S1. Competence in applying the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organisation

Assessment

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 then to JIRA. Only assessments submitted through JIRA and Canvas 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

(a) Planet has just announced an ordinary dividend per share of 20p. The past four years’ dividends per share have been 13p, 14p, 17p and 18p (most recent dividend last) and shareholders require a return of 14 per cent. What is a fair price for Planet’s shares? (25 marks)

(b)  Planet now decides to increase its debt level, thereby increasing the financial risk associated with its equity shares. As a consequence, Planet’s shareholders increase their required rate of return to 15.4 per cent. Calculate a new price for Planet’s shares. (10 marks)

(c)  Outline any problems with using the dividend growth model as a way of valuing shares.

(15 marks)

Total (50 marks)

Question 2 – Long term finance: Equity finance

(a)    Brand plc generates profit after tax of 15 per cent on shareholders’ funds. Its current capital structure is as follows:

Ordinary shares of 50p each                                                 £200,000

Reserves                                                                                 £400,000

£600,000

The board of Brand plc wishes to raise £160,000 from a right issue in order to expand existing operations. Its return on shareholders’ funds will be unchanged. The current ex-dividend market price of Brand plc is £1.90. Three different rights issue prices have been suggested by the finance director:

£1.80, £1.60 and £1.40.

Determine the number of shares to be issued, the theoretical ex-rights price, the expected earnings per share and the form of the issue for each rights issue price. Comments on your results.

(30 marks)

(b) It has become common for companies to offer their shareholders a choice between a cash dividend and an equivalent scrip dividend. Briefly consider the advantages of scrip dividends from the point of view of:

(i)  the company;

(ii)  the shareholders.

(20 marks)

Question 3 Investment Appraisal Techniques

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:
   1. The Payback Period

b. The Accounting Rate of Return.

1. The Net Present Value.

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

(20 marks)

1. 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+

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

There are currently two steps that you need to follow to ensure that you successfully submit your work for marking. Your submission links will become available approximately 3 weeks prior to your submission deadline, along with detailed instructions on how to submit your assignment, but in the meantime please feel free to also watch this Assignment Submission Instructions video.

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