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APC 308 Financial Management Assessment 2019
Module Leaders: Francis Kuagbela and Alex Addo
Knowledge
1. Examined and critically evaluated 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.
2. A critical understanding of specific analytical skills in key decision areas within strategy and finance at local and international level
3. A critical understanding of the limitations of the current state of financial theory in making strategic business decisions
Skills
4. Applied the key valuation concepts and methodologies of financial decision making in order to contribute to the wider decision making of the organisation
Assessment Criteria
Your seminar tutor on the basis of the following generic criteria will assess the paper:
Canvas & JIRA Deadline: Tuesday 11th February 2020 by 14.00pm
Assessment
UNIVERSITY OFSUNDERLAND
Faculty of Business and Law APC308 Financial Management – Individual assignment
Weighting – 100% of the marks for thismodule
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: Cost of capital and Capital structure
The finance director of Kadlex plc is currently reviewing the capital structure of her company. She is convinced that the company is not financing itself in a way that minimizes its cost of capital (WACC). The company’s financing as at 31 December 2017 is as follows:
£000
Ordinary shares, £1 each
20000
Reserves
5000
7% preference shares, £1 each
10000
10% bonds (irredeemable 31 December2017)
15000
Total capital
50000
Other information from stock market (as at 31December 2017): Ordinary share price (ex-div) £2.65
Preference share price (ex-div) 75p
Bond price for 10% bonds £107 per £100
Last 5 years’ dividends (most recent last) 21p, 23p, 25p 27p, 28p
The finance director feels that by issuing more debt the company will be able to reduce its cost of capital. She proposes the issue of £15m of 11 per cent bonds. These bonds will be sold at a 5 per cent premium to their par value and will mature after seven years. The funds raised will be used to repurchase ordinary shares which the company will then cancel. She expects the repurchase will cause the company’s share price to rise to £2.85 and the future dividend growth rate to increase by 20 per cent (in relative terms). She expects the price of the 10 per cent bonds to be unaffected, but the price of the preference shares to fall to 68p. Corporate tax stands at 30 per cent.
(a) Calculate the book value and market value cost of capital (WACC) for Kadlex plc.(10 marks)
(b) Given the proposed changes to Kadlex’s capital structure, recalculate the company’s cost of capital to reflect these changes and comment on the finance director’s projections. (10 marks)
(c) Critically discuss whether you consider that companies, by integrating a sensible level of gearing into their capital structure, can minimise their weighted average cost of capital, ensuring the response integrates relevant empirical research within this area of study.
(15 marks)
(d) Critically evaluate the effects of short-termism on bankruptcy and the agency problem in a company, ensuring the response is supported with relevant academic research.
(15 marks)
Question 2 – Long term finance: Equity finance
(a) Lexbel plc generates earnings after tax (PAT) of 20 per cent on shareholders’ funds. Its current capital structure is as follows:
£
Ordinary shares of 50p each 300,000
Reserves 400,000
700,000
The board of Lexbel plc wishes to raise £180,000 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 Lexbel plc is £1.90. Three different rights issue prices have been suggested by the finance director: £1.80, £1.60 and £1.40.
(b) Determine the:
i. number of shares to be issued.
ii. theoretical ex-rights price.
iii. expected earnings per share and
iv. form of the issue for each rights issue price, and
v. Present your results in a tabular form and critically evaluate the best option among the three right issues.
(20 marks)
(c) It has become common for companies to offer their shareholders a choice between a cash dividend and an equivalent scrip dividend. Critically discuss the advantages of scrip dividends from the point of view of the company and the shareholders, ensuring the response draws upon relevant academic research within this highly topical area of financial management.
(30 marks)
Question 3 Investment Appraisal Techniques
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:
(a) Calculate using the following investment appraisal techniques, and provide brief recommendations as to the economic feasibility of acquiring the machine:
i. The Payback Period.
ii. The Accounting Rate of Return.
iii. The Net Present Value.
iv. The Internal Rate of Return (to two decimal places)
(20 marks)
(b) Critically evaluate the benefits and limitations of each of the differing investment appraisal techniques, ensuring the response is supported with relevant academic research.
(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+
The learning outcomes for this module assessed by this piece of workare:
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.