Course Learning Outcomes:
1) Understand the importance of financial data in formulating and delivering business strategy.
2) Be able to analyze financial data for an organisation in order to inform strategic decision making purposes.
3) Be able to evaluate proposals for strategic decisions on capital expenditure in an organisation
Case Scenario:
You are to select an organization that has a listing on any recognized stock exchange of your choice. The organization can be either the one you are working with, or worked before, or any other organisation of your choice. You been asked to write a report. In the report you will answer the questions given below. For the purpose of this assignment you are required to use financial information pertaining to FY2016 & FY2017.
Answer the following questions given below:
Note: As a learner you have to precisely answer the questions given below. No question can be missed out to get the Pass grade, the learner has to answer all questions.
Problem 1: Financial information is one of the most important factors in right decision making for supporting a healthy business strategy. The financial information obtained is utilized by many parties including decision makers, investors, creditors, and so on. In the light of your chosen organisation:
a) Provide a brief introduction of your chosen organisation. Evaluate various sources of financial information that can be used in strategic decision making of the organisation.
b) Summarize by analyzing & interpreting Balance sheet & Income statement for FY2017 pertaining to your chosen organisation, asses the need for the financial data and information yielded and how this could be used for & applied to strategic planning and decision making? The learners are also advised to explain and assess the impact of Creative Accounting techniques in strategic decision making process.
c) Identify and analyze the characteristics of risks the organisation is exposed to that have an impact on financial decisions, specifying how the identified risks can be managed and mitigated.
Problem 2: Published accounts are official documents containing financial activities of an organisation for a specific period of time. Three main types of published accounts include Balance sheet, Income statement, and cash flow statement.
a) Advice a potential investor on investing in the business compared to placing his money in a deposit account. Assess the viability by interpreting at-least two published accounts to obtain the financial information required by you to be able to advise the investor.
b) Using a set of published accounts from your chosen organisation, carry out a comparative analysis of financial data by calculating ratios (FY2016 & FY2017), & interpreting the results to support business decision making. What recommendation would you give to the organisation based upon the analysis and interpretation of the financial information? For the purpose, following ratios must be calculated (Any six of them):-
1. Current Ratio
2. Quick Ratio
3. Operating Profit Margin Ratio
4. Price to Equity [P/e] Ratio
5. Gearing Ratio
6. Asset Turnover Ratio
7. Return on Capital Employed (ROCE).
8. Interest Cover Ratio
Although ratio analysis is an easy to use method for the interpretation of financial information but there are a number of limitations to using financial ratio analysis. Discuss by assessing the limitations of financial ratio analysis when used as a tool for strategic decision making. Also, explain and recommend, with justification, other methods and tools that allow businesses to analyze financial data and perform strategic decision making.
Problem 3: The company are considering selling their old machine that has a capital cost of £260 000 and replacing it with an up to date model costing £220 000. For immediate purchase the company will receive £120 000-part exchange allowance. Both the current and new machines are able to meet the expected company demand, estimated at:
Year Units
1 90 000
2 50 000
3 30 000
After three years, it is predicted that demand will be zero due to the technological developments in the industry.
The following data has been provided for the existing and new machine:
|
|
Current Machine £per unit
|
New Machine £ per unit
|
|
Direct Material
|
1.8
|
1.8
|
|
Direct Labour
|
0.75
|
0.6
|
|
Variable overhead
|
0.45
|
0.3
|
|
Depreciation
|
0.35
|
0.55
|
Additional information:
(1) The selling price for each component is £5.00 and this will remain constant for the next three years.
(2) The company expect the cost of direct materials and direct labor to increase by 5% each year.
(3) The company predicts that repair and maintenance costs for the current machine will be £7000 per annum.
(4) The current machine is expected to have a zero residual value at the end of year 3.
(5) The company predicts that repair and maintenance costs for the new machine will be £1000 per annum.
(6) The new machine is expected to have a £75 000 residual value at the end of year 3.
The company's cost of capital is 15%
Extract from the present value table for £1 at 15%
|
Year Units
|
|
|
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1 0.870
|
|
|
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2 0.756
|
|
|
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3 0.658
|
|
|
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4 0.572
|
Based on the above situation:-
a. Prepare a report by reviewing methods for appraising strategic capital expenditure projects and strategic direction? While estimating the attractiveness of the investment opportunity, assess the importance of managing cash flow.
b. Evaluate the above business proposal for capital expenditure in the organization using appropriate financial technique. You must also include an assessment of the impact of the business proposal on the strategic direction of the organization.
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