Assignment - Part 1
You're working in the Finance department of Wayne Enterprises. Your company has experienced a high volume of sales and therefore it has more liquid assets (cash) then initially anticipated. Your line manager, in an attempt to diversify the portfolio, is thinking of investing £0.5 Million in shares of Tesco plc.
Your line manager has asked for your opinion on the matter and has highlighted two main concerns about the potential investment; which are: the riskiness of the investment and whether the company is profitable. The financial statements of the company in their annual reports.
Annual Report of Tesco
REQUIRED:
(a) Calculate appropriate ratios for the years 2015 and 2016.
(b) Comment on the ratios calculated indicating whether the 2016 figures are an improvement on 2015.
(c) Identify any other information, you feel would be useful from the annual report, to give a better overall picture of how Tesco plc is performing.
(d) Advise your line manager, with reasons, whether she should invest.
Note: the final 10% of the grade will be allocated for presentation and referencing.
Assignment - Part 2
Please note this is a fictional case study.
Lou Lublin Books operates a chain of bookstores across the UK.
Robert Briggs started the company in 2001. Briggs started with one bookstore and gradually built up a chain across the country, usually by buying small independent book shops and re-branding them. Most of the shops were bought for cash, and some loans were taken out to pay for this. Most of these loans are still outstanding.
Briggs put together a team of managers for the shops and trained them all to provide a corporate feel and branding while offering the small town local feel of a book shop. The shops were chosen because of good location and foot-fall and initially they were all profitable.
As the growth of e-readers began and buying books online started to gain momentum, the company started to notice its sales falling across the country. To try and keep the business in good health there were a series of promotions and discounts, but this led to a reduction in margins which hurt profitability.
The fall in profitability has affected the position of the company with regard to its indebtedness and its ease of paying interest on its debts.
Briggs holds 55% of all the shares in the company meaning he can run the business and make all the decisions. 20% of the other shares are held by a finance company
who took the holding in return for offering a lower interest rate on one of the loans that Briggs used to buy other bookshops.
Recent Financial Statements
|
Income Statement for the year ended 31 December 2015
|
|
|
2015
|
2014
|
|
|
£'000
|
£'000
|
|
Revenue
|
3,301
|
3,043
|
|
Cost of Sales
|
(1,748)
|
(1,500)
|
|
Gross Profit
|
1,553
|
1,543
|
|
Selling Expenses
|
(920)
|
(950)
|
|
Administration Expenses
|
(100)
|
(111)
|
|
Finance Costs
|
(87)
|
(70)
|
|
Profit before tax
|
446
|
412
|
|
Taxation
|
(89)
|
(82)
|
|
Profit for the financial year
|
357
|
330
|
Balance Sheet as at 31 December 2015
|
|
2015
|
2014
|
|
|
£'000
|
£'000
|
|
Non-Current Assets
|
2,543
|
2,340
|
|
Current Assets
|
|
|
|
Inventories
|
658
|
500
|
|
Trade Receivables
|
220
|
183
|
|
|
878
|
683
|
|
Total Assets
|
3,421
|
3,023
|
|
Current Liabilities
|
|
|
|
Trade Payables
|
(345)
|
(220)
|
|
Overdraft
|
(100)
|
(84)
|
|
|
(445)
|
(304)
|
|
Non-Current Liability
|
|
|
|
Long Term Loan
|
(1,000)
|
(1,100)
|
|
Total Liabilities
|
(1,445)
|
(1,404)
|
|
Net Assets
|
1,976
|
1,619
|
|
Equity
|
|
|
|
Ordinary Shares of £0.05
|
300
|
300
|
|
Retained Earnings
|
1,676
|
1,319
|
|
Total Equity
|
1,976
|
1,619
|
Recent Developments
Briggs has for some time been considering entering the e-books and e-reader market. But he knows nothing about online retailing and his knowledge of the internet is limited to his general web-browsing.
An e-reader manufacturer, BLUC has recently contacted Lou Lublin Books to ask if they are interested in a supply of e-readers. BLUC makes the hand-held devices and also offers web-solutions to help run online e-book stores.
After negotiating with BLUC, Briggs has devised a plan to help Lou Lublin Books enter the world of e-books.
The proposal includes BLUC supplying Lou Lublin Books with e-readers and helping them set up an online bookstore stocked with the most well-known titles.
Briggs's idea is to bundle an e-reader with a subscription to the online store so the customer can read a certain number of new e-books each month as part of the subscription price.
The financial advisor to Lou Lublin Books has looked at Briggs's plan and calculated the following figures:
Subscription numbers are anticipated to be:
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
90,000
|
85,000
|
80,000
|
70,000
|
60,000
|
The subscriptions will last for 12 months and after employing a consulting agency to review the digital books market they will be sold for £25 each. The cost of the consulting agency's review is £55,000 which is now due for payment.
BLUC is willing to supply the e-readers in return for an immediate cash payment of £2.2m and ongoing royalty payments of 20% of total sales revenue each year, paid at the year-end in cash.
Briggs has assumed a decrease in sales from the physical bookstores if this plan goes ahead due to customers moving from physical books to electronic ones. The financial advisor reckons this will amount to £300,000 a year. Software engineers will be used to set the system up and this will involve an immediate cash payment of £300,000.
The other costs of the project are as follows per annum.
The financial advisor believes there will be no significant inflation over the next five years and therefore have not included inflation in the above figures.
Lou Lublin Books has some debt and its shares are not quoted on the stock market. If the proposal was to go ahead then the company would need to raise additional finance. The financial advisor has not recommended which way to go with regards to the choice of financing.
REQUIRED:
Calculate Inventory Turnover, Trade Payables and Trade Receivables for both years.
Comment on the results you have calculated in a) above, making particular reference to any suggestions for areas of improvement you can think of and any specific advise on methods for improving the efficiency of the company's working capital management.
Prepare a schedule of cash flows for the project. Calculate, using the information available, the Net Present Value of the proposal to sell the bundles of e-readers and run the e-book store. Include in your answer a justification for whether or not you recommend Lou Lublin Books to go ahead with this proposal. You should assume the relevant cost of capital is 13%.
Calculate the payback period for the proposed project to sell e-books, if the company has a policy of only accepting projects with payback of less than 3 years, would this be accepted? Comment on the suitability of the payback method compared to the NPV method of appraising projects.
Discuss the choice of financing for the project to bundle the e-readers and subscriptions. You should reference the general advantages and disadvantages of the main financing choices as well as relating your answer to the specific circumstances of Lou Lublin Books and Robert Briggs.