APC 308 Financial Management Assessment 2019
Canvas & JIRA Deadline: Tuesday 11th February 2020 by 14.00pm
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:
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.
Assessment Criteria
Categories
Grade Relevance Knowledge Analysis Argument and
Structure Critical Evaluation Presentation Reference to Literature
86 –
100% The work examined is exemplary and provides clear evidence of a complete grasp of the knowledge, understanding and skills appropriate to the Level of the qualification. There is also ample excellent evidence showing that all the learning outcomes and responsibilities appropriate to that Level are fully satisfied. At this level it is expected that the work will be exemplary in all the categories cited above. It will demonstrate a particularly compelling evaluation, originality, and elegance of argument, interpretation or discourse.
76-85% The work examined is outstanding and demonstrates comprehensive knowledge, understanding and skills appropriate to the Level of the qualification. There is also excellent evidence showing that all the learning outcomes and responsibilities appropriate to that level are fully satisfied. At this level it is expected that the work will be outstanding in the majority of the category as cited above or by demonstrating particularly compelling evaluation and elegance of argument, interpretation or discourse.
70 –
75% The work examined is excellent and is evidence of comprehensive knowledge, understanding and skills appropriate to the Level of the qualification. There is also excellent evidence showing that all the learning outcomes and responsibilities appropriate to that level are satisfied. At this level it is expected that the work will be excellent in the majority of the categories cited above or by demonstrating particularly compelling evaluation and elegance of argument, interpretation or discourse.
60 –
69% Directly relevant to the requirements of the assessment A substantial knowledge of relevant material, showing a clear grasp of themes, Good analysis, clear and orderly Generally coherent and logically structured, using an appropriate mode of argument and/or theoretical mode(s) May contain some distinctive or independent thinking; may begin to formulate an independent Well written, with standard spelling and grammar, in a readable style Critical appraisal of up- to-date and/or appropriate literature. Recognition of different perspectives.
Very good use of
questions and issues therein position in relation to theory and/or practice. with acceptable format source material. Uses a range of sources
50 –
59% Some attempt to address the requirements of the assessment: may drift away from this in less focused passages Adequate knowledge of a fair range of relevant material, with intermittent evidence of an appreciation of its significance Some analytical treatment, but may be prone to description, or to narrative, which lacks clear analytical purpose Some attempt to construct a coherent argument, but may suffer loss of focus and consistency, with issues at stake stated only vaguely, or theoretical mode(s) couched in simplistic terms Sound work which expresses a coherent position only in broad terms and in uncritical conformity to one or more standard views of the topic Competently written, with only minor lapses from standard grammar, with acceptable format Uses a variety of literature which includes some recent texts and/or appropriate literature, though not necessarily including a substantive amount beyond library texts. Competent use of source material.
40 –
49% Some
correlation with the
requirements of the assessment but there is a significant degree of irrelevance Basic
understanding of the subject but addressing a limited range of material Largely descriptive or narrative, with little evidence of analysis A basic argument is evident, but mainly supported by assertion and there may be a lack of clarity and coherence Some evidence of a view starting to be formed but mainly derivative. A simple basic style but with significant deficiencies in expression or format that may pose obstacles for the reader Some up-to-date and/or appropriate literature used. Goes beyond the material tutor has provided. Limited use of sources to support a point. Weak use of source material.
35 –
39% Relevance to the requirements of the assessment may be very intermittent, and may be reduced to its vaguest and least challenging terms A limited understanding of a narrow range of material Heavy dependence on description, and/or on paraphrase, is
common Little evidence of coherent argument: lacks development and may be repetitive or thin Almost wholly derivative: the writer’s
contribution rarely goes beyond simplifying paraphrase Numerous
deficiencies in expression and presentation; the writer may achieve clarity (if at all) only by using a simplistic or repetitious style Barely adequate use of literature. Over reliance on material provided by the tutor.
The evidence provided shows that the majority of the learning outcomes and responsibilities appropriate to that Level are satisfied.
30 –
34% The work examined provides insufficient evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence provided shows that some of the learning outcomes and responsibilities appropriate to that Level are satisfied. The work will be weak in some of the indicators.
15-29% The work examined is unacceptable and provides little evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence shows that few of the learning outcomes and responsibilities appropriate to that Level are satisfied. The work will be weak in several of the indicators.
0-14% The work examined is unacceptable and provides almost no evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence fails to show that any of the learning outcomes and responsibilities appropriate to that Level are satisfied. The work will be weak in the majority or all of the indicators.