Description
BIRMINGHAM CITY UNIVERSITY
BIRMINGHAM CITY BUSINESS SCHOOL
POSTGRADUATE DEGREES
COURSEWORK FRONT SHEET
MODULE TITLE : Managerial Finance
MODULE CODE : ACC7032
LECTURER : Amerdeep Jakhu
ISSUE DATE : TBC HAND IN DATE: 24th July 2024 at 12.00pm (midday)
HAND BACK DATE : 12th August 2024
QUESTION 1
The scenario
Nebula Holdings Plc is based in Edinburgh , United Kingdom serving UK and Europe. Nebula Holdings Plc is headed by Roa Li an experienced and successful Orthopaedic surgeon, who runs diverse range of businesses and private health clinics. It operates from a rented Head Office premises in central Edinburgh with a Shared Services Centre serving the group. Nebula Holdings Plc has investments and interests in Healthcare Industry (Private Health Clinics) and in the Discount and DIY Industry.
The Private Health Care Clinics business operates under the name Mercury Private Health Clinics (MPHC) has own clients, serves NHS patients and hires NHS properties. MPHC operates in line with the Care Quality Commission (CQC) standards and requirements. MPHC however recently lost two paralysed service user contracts following a complaint for a delayed completion of disabled toilets renovation project. Under Sheila Roberts as Managing Director (a qualified Mental Health Nurse), MPHC had enjoyed year-on-year growth, however profitability has (since January 2020) been heavily impacted by various macro factors e.g COVID-19, Brexit in the UK affecting such costs as food costs, energy costs and property rents and business rates etc.
The scenario is that the UK government is determined to use the private sector to tackle the NHS backlog (Mason, 2023).
Nebula Holdings Plc operates in the DIY and discount store sector under the name Bilko where it owns and operate a DIY and discount chain with 240 stores on the high street across the United Kingdom.
Bilko owns the high street properties it operates in and plans to expand its chain. Bilko is run by Imran Ali (Managing Director) a Discount Store Investment Specialist with a knack for spotting and turning around failing business into profitable ones. Under Imran Ali’s ten-year leadership, Bilko has maintained strong year-on-year growth and profitability until 2020 when profitability and growth declined despite the demise of Wilko in August 2023 and due to COVID-19, Brexit and many other macro factors in the UK. On reviewing this unpleasant profitability position, Roa Li demanded for the position to improve citing Wilko’s current (2023) going-concern issues (Which, 2023) as an opportunity for growth and improved profitability for Bilko.
Bilko competes with such names as Bargain Buys, B&M etc.
Following deliberations, Nebula Holdings Plc Strategic Business Committee recommended that Nebula Group should acquire a good fit for strategic synergistical benefits to Nebula Holdings Plc for improved growth and profitability. The identified two possible acquisition targets and would want you to perform some ratio analysis, evaluate the findings and advise the committee on which one they should acquire and why. The target companies are below:
Ventura Private Health Clinic Ltd: A prominent profitable health Clinic offering surgical procedure, diagnostic scans and medical checks. Ventura Ltd has a strong network of support teams and has maintained an Outstanding Rating from Care Quality Commission for the past 8 years under the leadership of the current Managing Director who has been in charge for the past 10 years.
‘Insourcing’ agencies that charge the health service to treat patients at weekend and evenings to reduce NHS waiting lists and have won Ventura millions of pounds of government funding. Other players operating in a similar fashion to Ventura are Australian healthcare multinational Ramsay and Spire Healthcare who bid and are successful in achieving direct contracts from the National Health Service Trusts.
Pioneer Properties Ltd: Led by founder John Pioneer a seasoned Property Developer and Architecture, Pioneer Properties Ltd has delivered various property development projects, renovations and has a successful Buy, Revamp, Rent, Refinance and Repeat (BRRRR) portfolio and strategy. The other properties are leased and Pioneer coverts some in Community diagnostic centres.
Financial results for the year ended 31 August 2023 for Ventura Private Health Clinic Ltd and Pioneer Properties Ltd are given below:
Below are the target companies’ extracts from their financial statements:
Statements of Profit or Loss (SoPL) for the year ended 31 August 2023
| Ventura Private Health Clinic Ltd | Pioneer Properties ltd | |||
| £ | Vertical Analysis | £ | Vertical Analysis | |
| Turnover | 1,756,345 | 100% | 2,094,238 | 100% |
| Cost of sales | (1,071,783) | 61.02% | (1,667,348) | 79.62% |
| Gross Profit | 684,562 | 39.98% | 426,890 | 20.38% |
| Adm & other operating expenses | (443,420) | 25.25% | (103,987) | 4.97% |
| Net Operating Profit | 241,142 | 13.73% | 322,903 | 15.42% |
| Finance charges | (169) | 0.01% | (203,022) | 9.69% |
| Profit before Tax | 240,973 | 13.72% | 119,881 | 5.72% |
| Tax | (45,785) | 2.61% | (22,777) | 1.09% |
| Profit of the year | 195,189 | 11.11% | 97,103 | 4.64% |
Statements of Financial Position (SoFP) as at 31st August 2023
| Purecare solutions | Pioneer Properties ltd | |||
| Fixed Assets | £ | Vertical Analysis | £ | Vertical Analysis |
| Tangible assets | 465,734 | 58.89% | 1,045,980 | 90.65% |
| Total non- current assets | 465,734 | 58.89% | 1,045,980 | 90.65% |
| Current Assets | ||||
| Trade receivables | 301,298 | 38.10% | 40,345 | 3.50% |
| Cash at bank and in hand | 23,765 | 3.01% | 67,542 | 5.85% |
| Total current assets | 325,063 | 41.11% | 107,887 | 9.35% |
| Total Assets | 790,797 | 100.00% | 1,153,867 | 100.00% |
| Liabilities | ||||
| Current liabilities –Trade Payables | 14,654 | 1.85% | 60,762 | 5.27% |
| Non-current liabilities : Bank loans | 76,459 | 9.67% | 735,908 | 63.78% |
| Total Liabilities | 91,113 | 11.52% | 769,670 | 69.04% |
| Equity and Reserves | ||||
| Called up share capital | 1 | 0.00% | 3 | 0.00% |
| Retained Profit | 699,683 | 88.48% | 357,194 | 30.96% |
| Total Equity | 699,684 | 88.48% | 357,197 | 30.96% |
| Total Equity and Liabilities | 790797 | 100.00% | 1,153,867 | 100.00% |
The ratio analysis below is in 4 categories (Profitability, Liquidity, Management Efficiency, and Gearing), but is incomplete.
| Ratios | Formulae | Purecare Solutions | Kindra Properties | |
| Profitability Ratios | ||||
| ROCE | Net operating profit/total capital employed | % | 9.17% | |
| Return on Assets | Net operating profit/Total assets | % | 9.00% | |
| Asset turnover | Turnover/Total assets | x | 95.64% | |
| Gross profit margin | Gross profit/Turnover | % | 37.62% | |
| Net profit margin | Net operating Profit/Turnover | % | 9.41% | |
| Efficiency ratios | ||||
| Receivables collection period | Trade receivables/Turnover *365 | days | 145.40 | |
| Payables payment period | Trade payables/Cost of sales *365 | days | 11.34 | |
| Cash cycle | Receivables – Payables | days | 134.06 | |
| Liquidity ratios | ||||
| Current ratio | Current assets/Current Liabilities | x: 1 | 20.56 | |
| Financial risk or gearing ratios | ||||
| Gearing ratio | Non – current liabilities /Total capital employed | % | 9.85% | |
| Interest cover ratio | Net operating profit/Interest charges | x | 11.49 | |
Requirements
1.1 You are required to calculate ratios for Pioneer Properties. (11 marks)
1.2 Prepare a business report (using a proper report format), maximum 2 pages long (+/- 10%), to Nebula Holdings Plc Strategic Business Committee based on ratio analysis and relevant qualitative issues to be considered. Your 400-word report must evaluate the financial statements and ratio analysis and make a convincing argument for investment in one of the two target companies. Your analysis, conclusions and recommendations should be supported by credible academic references (in Harvard Referencing format per Birmingham City University policy) using proper academic/ business English. (800 words, 14 marks)
1.3 Critically evaluate the working capital management (WCM) of both companies and draw conclusions on which is stronger. In conjunction with quantitative measures, provide some qualitative aspects (exp. Industry related characteristics) for a more comprehensive understanding of working capital management of the companies. (200 words, 5 marks)
1.4 Prepare a table describing possible sources of funding Nebula Holdings Plc should consider to finance the investment in the targeted company. Your explanation of possible sources of funding must be accompanied by a critical, well-reasoned, well-referenced conclusion and recommendation(s). (350 words, 5 marks)
Other marks:
– Conclusions and recommendations [2 marks]
– Credible academic citations [2 marks]
– Layout, structure and grammar [2 marks]
QUESTION 2A
Xiaomi Media sells a range of media and gaming products in package deals. The products sold within bundles are as follows.
| PS5 | Apple watch | Speaker Bullet | |
| Selling price £ | 650 | 150 | 200 |
| Variable cost £ | 650 | 75 | 125 |
Package A consists of a PS5 and an Apple watch and is sold for a discounted price of £725.
Package B consists of a PS5, an Apple Watch and two speakers and is sold for a discounted price of £875.
Currently packages are sold in a ratio of 2 Package As for every 3 Package Bs and 500 packages are sold each month. Fixed costs are expected to be £120,000 for the month.
Required
I.Calculate the contribution per package for Package A and Package B. 2
II.Calculate the break even point (in number of packages and sales revenue)
- If only Package As are sold 1
- If only Package Bs are sold 1
- If both packages are sold in the current sales mix, calculate the breakeven point per mix first, the unit for each product and the total units. 2
III.Calculate the margin of safety (in number of bundles and as a percentage) if the current sales mix remains unchanged. 1
IV.Calculate the current expected profit. 2
V.Calculate the number of packages which need to be sold in order to achieve a profit of £75,000 in the month assuming the sales mix remains unchanged. 2
- Write a memo to management which considers:
- Which is the best package sell and why
- Whether this selling package is realistic and why or why not?
- Explain how else the profitability of the business could be improved, using academic references where appropriate 4
QUESTION 2B
The company’s board has contacted you to provide your expert advisory input regarding its expansion strategy. This strategy involves the establishment of a new business entity. Enclosed are the statistics for the initial endeavour, which is scheduled for launch in the area of Wales in the upcoming year.
As per the company’s guidelines, all choices must be grounded in the outcomes derived from computing the Net Present Value (NPV) of cash flows spanning a 3-year period, utilizing a 12% cost of capital. Additionally, the Payback Period (PBP) must not exceed 3 years, while ensuring that the project’s Internal Rate of Return (IRR) offers a 5% buffer to account for potential rises in inflation or interest rates.
The capital outlay encompasses £15,000 designated for the land, £19,480 allocated for building expenses, and £12,196 earmarked for fixtures and equipment.
In the first year, the anticipated cash inflows are as follows: a cumulative sales revenue of £56,320; £12,004 worth of X products’ cost of goods sold; £7,660 from Y stock sales; staff expenditures amounting to £3,333; lighting and heating costs of £3,214; and additional overhead expenses of £10,000. Subsequent years will feature identical cash inflows, but they are projected to escalate by 2% due to annual inflation.
Requirements for Question 2 part (b)
Using the information above and in accord with the above stated company policy you are required to calculate:
i.Net Present Value (NPV) 4 marks
ii.Payback period (PBP) and Discounted Payback Period (DPBP) 4 marks
iii.Internal Rate of Return 1 marks
iv.Based on your calculations do you recommend the investment is made and the opening of the new manufacturing unit? 2 marks
v.Critically discuss the limitations of the above project appraisal techniques used and any other recommendations to the board. Using academic references 2 marks
vi.Thoroughly analyse the constraints associated with the project appraisal methods mentioned earlier, and provide a comprehensive evaluation of other suggestions concerning matters to the board should consider prior to reaching a definitive investment verdict. Using academic references 2 marks
QUESTION 3
Legacy Roofing Global Ltd specialises in roofing sheets manufacturing producing three variants below: 1. Basic – this is transparent mainly for use on garden sheds.
- Standard – standard quality house roofing sheets.
- Premium – high quality house roofing sheets.
Each of these roofing sheets uses Special Weatherproof Material which blocks outside weather from affecting indoors. Due to industrial actions, the maximum supply of the Special Weatherproof Material as confirmed by Protect Supplies Ltd, the supplier is 312,300 mitres.
Maximum market demand and resource requirements of each of these roofing sheets for year 2024 are shown below:
Budgeted data year ending 31 August 2024
| Basic | Standard | Premium | |
| Maximum demand | 21,000 | 45,000 | 32,000 |
| Special weatherproof material per sheet (mitres) | 2 mitres | 5 mitres | 6 mitres |
Legacy Roofing Global Ltd’s employs a low cost and no-frills strategy aiming value for money delivery to its customers. To curtail high cost of stock storage, Legacy Roofing Global Ltd operates on a just-in-time production (JIT) method so that opening and closing inventory levels of the Special Weatherproof Material are zero.
Without mandate, Amelia Rose Legacy Roofing Global Ltd’s Sales Director has already accepted an order for 12,000 Standard Roofing Sheets Contract to Rolco Construction Group that, if not fulfilled, would incur a financial penalty of £18,000. This order is not included in the Standard’s maximum market demand figure. This implies Legacy Roofing Global Ltd should prioritise fulfilment of the Standard Roofing Sheets Contract ahead of normal annual demand requirements. The contract selling price per Standard Roofing Sheet is the same as normal Standard Roofing Sheets.
Legacy Roofing Global Ltd’s directors need to know whether they should go ahead and satisfy the contract and then prioritise production in the normal way or whether it should consider breaching the Rolco Construction Group’s Standard Roofing Sheets Contract.
You have been provided with the following actual results for years ended 31 August 2022 and August 2023:
Actual results for year ended 31 August 2022
| Basic | Standard | Premium | Total | |
| Sales (number of sheets) | 7,800 | 24,020 | 17,860 | |
| Sales Revenue | 109,590 | 473,194 | 430,426 | 1,013,210 |
| Raw materials | 24,960 | 112,894 | 96,444 | 234,298 |
| Direct Labour | 31,200 | 127,306 | 128,592 | 287,098 |
| Semi variable overheads | 42,200 | 76,350 | 84,180 | 202,730 |
| Total Costs | 98,360 | 316,550 | 309,216 | 724,126 |
| Profit/ (Loss) | 11,230 | 156,644 | 121,210 | 289,084 |
Actual results for the year ended 31st August 2023
| Basic | Standard | Premium | Total | |
| Sales (number of sheets) | 8,300 | 26,340 | 21,320 | |
| Sales Revenue | 116,615 | 518,888 | 513,812 | 1,149,325 |
| Raw materials | 26,560 | 142,236 | 136,448 | 305,244 |
| Direct Labour | 42,330 | 165,942 | 172,692 | 380,964 |
| Semi- Variable Overheads | 43,100 | 82,430 | 98,740 | 224,270 |
| Total Costs | 111,990 | 390,608 | 407,880 | 910,478 |
| Profit/ (loss) | 4,625 | 128,290 | 105,932 | 238,847 |
The selling price per roofing sheet, raw materials, other variable overheads and labour costs per roofing sheet for year ending 31 August 2024 will be the same as those in year ended 31 August 2023.
Required:
Use Management Accounting techniques for example High-Low Method where necessary and applicable.
3.1. In light of the scenario above, rank these three roofing sheet variants (Basic, Standard and Premium) in the order in which they must be produced by Legacy Roofing Global Ltd – Rank 1 being the one to be prioritised. Clearly show your workings. [3 marks]
3.2. Prepare a budgeted production schedule and a Marginal Costing Income Statement (analysed by product) the year ending 31 August 2024 assuming that the Standard contract is honoured. [3 marks for the Production Plan, 5 marks for the Marginal Costing Income Statement = 8 marks]
3.3. Prepare budgeted production schedule and a Marginal Costing Income Statement (analysed by product) for the first half of 2018 assuming that the Standard contract is not honoured. [3 marks for the Production Plan, 5 marks for the Marginal Costing Income Statement = 8 marks]
3.4. Considering quantitative and qualitative issues, critically evaluate then advise Legacy Roofing Global Ltd’s Directors whether to accept or reject the Rolco Construction Group’s Standard Roofing Sheets Contract. [4 marks]
3.5. You have now been advised that a new roofing sheets manufacturer that will compete with Legacy Roofing Global Ltd has been established that would force Legacy Roofing Global to reduce its selling price per roofing sheet by 15% in 2024. Protect Supplies Ltd, the supplier of Special Weatherproof Material has also hinted that the price of the Special Weatherproof Material might increase by 10% in 2024. Assuming these changes (15% selling price per sheet reduction and a 10% increase in the Special Weatherproof Material), calculate the Breakeven Point number of sheets and Breakeven Point Revenue (£s) for each product. [3 marks]
3.6. Critically examine the assumptions and limitations of the Cost-Volume-Profit Analysis technique in relation to Legacy Roofing Global Ltd. [4 marks]
NB: In your analysis, please cite credible sources using Legacy Harvard reverencing Style per Birmingham City University (BCU) requirements. Support and guidance can be sought from The Centre for Academic Success and the Library).
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