Coverage of Theoretical Underpinnings Financial Analysis - Accounting Assignment Help

Assignment Task

Financial Analysis
Your report will be assessed as a whole in the following areas:Coverage of theoretical underpinnings involvedDemonstration of a critical understanding of the theoretical aspects involved Practical application of the theoretical aspects of the case study Application of mathematical knowledge Evidence of additional and relevant research Coherence and quality of the report

Introduction
Put yourself in the following situation as a member of the Financial Services Team of Daffodil Electronics.
You have been requested to provide meaningful financial analysis and information for decision making concerning financing, performance, capital investment, constrain in production, budgeting and variance analysis. Accordingly, you are required to write a report (3,000 words in total) providing information about these areas.
You must submit the report online via the Turnitin link by 15:00 pm (UK time) on 17th June 2021 (Thursday). Please use the Harvard referencing where relevant, do not use lecture slides or any Pedia (such as Wikipedia or Investopedia) as reference. You should report your calculations and supplementary information in Appendix. Don’t forget to mention your assumptions and the limitations of your analysis.
Financial analysis related to Investment Strategy:
Daffodil Electronics has grown from a company with £10,000,000 turnover to one with a £201m turnover and £18m profit in the last twenty years. The existing owners have put all their financial resources into the firm to enable it to grow. The directors wish to take advantage of a fascinating market opportunity after Brexit but would need to find £50m of new equity capital as the balance sheet is already over-geared (i.e. has high debt). The options are discussed in a relatively uniform way, including flotation on the Main Market of the London Stock Exchange, flotation on the Alternative Investment Market (AIM), and private equity. Write a report to enlighten the board on the merits and disadvantages of each of these three possibilities.(10 Marks)
Ms Victoria is the Investment Manager and has requested some analysis concerning a proposed 5-years investment. The company plans to open a showroom in York and have narrowed their selection down to two locations: (1) City Centre and (2) Clifton Moor. You have to evaluate these options based on the following information. Daffodil will lease the showroom initially for 5 years, and the total initial cost of investment is estimated to be £10 million each.
Option one: City Centre
It is expected that the City Centre showroom will increase the overall sales revenue of the company by 10% per annum from 2020, and the variable cost will be forty-two percent of sales revenue. The fixed overhead cost will be £3,500,000, £2,000,000 and £1,500,000 in the first, second, and third years. The promotion cost will be £500,000 in the first two years and £200,000 for the next three years. All other expenses will be 10% of the total contribution margin. In the second year, the company will need a working capital investment of £2 million, and 60% of which will recover at the end of project life. The company follows a straight-line depreciation method and expects to sell the assets at 20 % of historical cost in year 5.
Option two: Clifton Moor
On the other hand, if the showroom is opened at Clifton Moor, then it will require fixed overhead cost for four years £2,500,000 in year one, £1,800,000 in year three, £2,100,000 in year four and £1,100,000 in year five. All other costs will increase and be at 10% per year of the contribution margin. The working capital investment will be £1,500,000 in year three, and 55% of it will recover in the last year. The sales revenue will increase at 12% per annum, and variable cost will be 45% of sales. The company will follow a similar strategy for depreciation and promotional cost, just like the city centre.
Financing the investment
The company has several choices for financing this expansion – issuing new equity or bond or using existing retained earnings. The shares of Daffodil are traded in the Alternative Investment Markets (AIM) for £30, however, the face value is £20 and last year’s dividend was £0.35. HSBC will charge a flotation cost of 10% to issue the new common stock in the market. There is a projection that the dividend will grow at 6% a year in the coming years. The firm can issue an additional long-term bond at an interest rate (before tax) of 10 % (i.e. Coupon rate). Currently, similar bonds are selling at £110, slightly over the face value (which is £100), with five years of maturity. The market risk premium is 5%, the 3-month UK gilt rate is 3.5% (risk-free rate), and the average Beta of the Electronic goods industry is 1.73.
The company is also planning to issue preferred stocks. The industry average preferred dividend and current market price are £10 and £96, respectively. The company wants to maintain a capital structure of approximately 45% debt, 5% preferred equity and 50% of ordinary equity. The current corporate tax rate is 35%.
Required
Determine the Weighted Average Cost of Capital (WACC) for target capital structure.
Evaluate which showroom should be selected (Hints: use NPV and IRR). Ms Victoria prefers to use CAPM (i.e., Capital Asset Pricing Model) over DDM (i.e., Dividend Discount Model).
Advise accordingly with appropriate assumptions and rationales for the future.
(5+10+5 = 20 Marks)
[Following profit statement is provided for your reference to calculate the net cash benefit by your investment manager Ms Victoria]
PROFIT STATEMENTS (£ million) Years 2016 2017 2018 2019 2020
£ £ £ £ £
Sales revenue 176.200 190.000 199.110 201.240 201.545
Cost of Sales 28.629 31.294 32.111 32.919 32.382
Gross profit 147.571 158.706 166.999 168.321 169.163
Fixed and semi-variable costs Fixed overhead 34.283 40.872 42.478 44.014 45.523
Promotion 5.000 6.000 7.000 8.000 9.000
Research and Development 6.000 6.500 7.000 7.500 8.000
Depreciation 31.500 49.400 51.350 53.300 55.250
New model launch 20.000 0.000 0.000 0.000
Professional charges 8.000 8.000 8.000 8.000 8.000
Stock upkeep 0.000 0.362 0.376 0.472 0.504
Total fixed and semi variable 104.783 111.134 116.203 121.286 126.277
Operating profit 42.788 47.572 50.795 47.036 42.887
Interest on loans 15.000 25.000 30.000 30.000 15.000
Profit before tax 27.788 22.572 20.795 17.036 27.887
Tax 9.726 7.900 7.278 5.962 9.760
Profit after tax 18.062 14.672 13.517 11.073 18.126
Dividends 10.000 10.000 10.000 10.000 10.000
Retained earnings 8.062 4.672 3.517 1.073 8.126
Financial Analysis for internal management:
The management accounting team of Daffodil Electronics also come up with some questions and request you to explain/answer them for the upcoming board meeting:
What is the point of distinguishing absorption and marginal costing? Why do they report different profits? Explain with an example. (5 Marks)
The management of M&M, a subsidiary of Daffodil, is concerned about its inability to obtain enough trained labour to enable it to meet its current budgeted projection:
Service A B C Total
Sales revenue 47 37 41 125
Variable costs Materials 8 6 7 21
Labour 11 8 14 33
Expenses 5 4 4 13
Allocated fixed cost 6 15 12 33
Total cost 30 33 37 100
Profit 17 4 4 25
The available labour cost to spend is £23,000. All the labours are paid at the same hourly rate across the services. You are requested to prepare a plan to produce a higher profit, ensuring that at least 50 per cent of the budgeted sales revenues could be achieved for each service.
Prepare the statement, with explanations, showing the highest profit could be achieved from the limited amount of skilled labour available within the constraint stated.(10 Marks)
What steps could the business take to improve profitability in light of the labour shortage?(5 Marks)
M&M makes Product E, the standard costs of which are:
Sales Revenue £40
Direct labour (1 hour) (13)
Direct materials (1 kg) (12)
Fixed overheads (5)
 

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