Business Finance

This report covers different methods of calculations like cash flow method, NPV, internal rate of return. Along with analysis different types of ratios to analysis the performance of business.

Business Finance

Contents
INTRODUCTION...........................................................................................................................................3
QUESTION 1.................................................................................................................................................3
Computation of net cash inflow..............................................................................................................3
b) Determination of internal rate of return.............................................................................................4
(c) Financial viability of investing in the project.......................................................................................5
(d) Compare and contrast the differing methods that can be used to account for risk.........................5
QUESTION 2.................................................................................................................................................6
(a) Calculation of average operating cycle in days and how this measure is put to use..........................6
b) Calculation and interpretation of current and acid test ratio..............................................................7
(c) Differing type of risks and costs that could possibly be reduced by following the finance director’s
proposed proposal to reduce inventory levels........................................................................................8
QUESTION 3.................................................................................................................................................9
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC...............................9
New share price = 54*65% = 35.1..........................................................................................................10
b) Calculate the value of the rights associated with holding shares in Mainsbury PLC..........................10
c) Evaluating each of the option available to investor...........................................................................10
d) Comparing and contrasting the various options available to business..............................................11
QUESTION 4...............................................................................................................................................12
a) Calculating the ratios for Crusher PLC...............................................................................................12
b) Analysing the financial position of the Crusher PLC..........................................................................17
CONCLUSION.............................................................................................................................................18
REFERENCES..............................................................................................................................................19

INTRODUCTION
The method through which a financial supervisor delivers funds for business usage as and
when this is required is known as business finance. This provision must be made in accordance
with necessities. Budgetary Control, but in the other extreme, is an economics area concerned
with the creation and distribution of finite resources to the most efficient user inside this business
(or the firm). A market-based pricing structure is used to allocate those commodities. A business
needs capital in the form of cash collected from investors (Siddik and Kabiraj, 2020). Only
within company, funding must be directed to initiatives that will generate the best results. In this
report consist of different methods of calculations like cash flow method, NPV, internal rate of
return. Along with analysis different types of ratios to analysis the performance of business.
QUESTION 1
Computation of net cash inflow
Particulars
Year
2011
Year
2012
Year
2013
Year
2014
Year
2015
Sales (no. of units *
rate) (In£)
360000
0
427500
0
562500
0
405000
0
270000
0
Less: expenses (in£)
Variable labor cost 375 375 375 375 375
Variable material cost 250 250 250 250 250
Lease 550000 550000 550000 550000 550000
Administrative cost 600000 600000 600000 600000 600000
Total expenses
115062
5
115062
5
115062
5
115062
5
115062
5
Less: Depreciation 500000 500000 500000 500000 500000
Earnings before interest
and tax
194937
5
262437
5
397437
5
239937
5
104937
5
Less: Interest 0 0 0 0 0

Earning before tax
194937
5
262437
5
397437
5
239937
5
104937
5
Less: Tax 0 0 0 0 0
Earning after tax
194937
5
262437
5
397437
5
239937
5
104937
5
Add: Depreciation 500000 500000 500000 500000 500000
Net cash inflows
244937
5
312437
5
447437
5
289937
5
154937
5
Year Net cash
inflows
Present
value
factor
Discounted
cash
inflows
2011 2449375 0.926 2267939.81
5
2012 3124375 0.857 2678647.97
7
2013 4474375 0.794 3551903.13
3
2014 2899375 0.735 2131127.17
9
2015 1549375 0.681 1054478.59
1
Total of present value factor &
discounted cash inflows
14496875 11684096.7
Computation of Net present
value

Total discounted
cash inflows
11684096
.7
Less: Initial
investment 2500000
Net present value
9184096.
695
b) Determination of internal rate of return.
Computation of IRR:
IRR
Year Cash inflows
0 -2500000
2011 2449375
2012 3124375
2013 4474375
2014 2899375
2015 1549375
Total of IRR 112%
(c) Financial viability of investing in the project
Financial viability is defined as the capacity to produce enough revenue
to cover operational expenses, debt obligations, and, when appropriate,
allow for growth while sustaining quality of service. The financial plan serves
as a vehicle for the team to understand its lengthy objectives. When seen in
the social context overall, a project is financially efficient if its economic

advantages outweigh its potential impacts. External costs and ecological
consequences should be evaluated because the development's potential
consequences are not just about its costs involved (LESTARI and et.al, 2020).
(d) Compare and contrast the differing methods that can be used to account for risk
Investors are looking for safer investing choices as the global economy becomes more
volatile. When choosing investments, traders employ a capital budget. A capital budget is a
strategy for spending money on long-term assets like structures and machines. These investments
are rife with risk. Cash flows was not paid upfront as planned, the possibility of the acquirer firm
failing, and administration putting the deposited assets in hazardous initiatives are just a few of
the hazards. Companies can reduce costs by including risk into capital planning (Nielsen and
Kristensen, 2020).
Handle asset allocation properly: Appropriate asset allocation refers to
how a portfolio's investments are weighted in order to achieve a certain goal
— and it might be the single most critical element in the portfolio's
performance. For example, if their aim is to seek growth and they're
prepared to incur market risk to do it, they may opt to invest up to 80% of
their assets in stocks and just 20% in bonds. Make sure you understand the
investing period and the potential risks and benefits of each asset class
before deciding how to split the asset classes in your portfolio (Lewin and
Cachanosky, 2020).
Assets allocation: It's possible that the asset allocation made a year ago
won't work in today's market. When they don't review assets on a regular
basis under this situation, the portfolio's investment risk might skyrocket. As
a result, keeping track of your financial assets gets critical. They must
examine them on a regular basis since it aids in restoring your overall
portfolio appropriate investment portfolio and, as a result, reducing risks
(Brown and Rocha, 2020).
Identifying risk tolerance ability: When it comes to investing in the stock
market, everyone has the ability to accept risks. When investing money, one

must evaluate the level of risk they are willing to face terms of age, salary,
family, and other factors. “Shareholders frequently take on more risk than is
necessary. And it's brought to light whenever there's a financial slump.
Recognizing your appetite for risk and the hazards in investment adviser can
help you avoid mental disturbances and protect your income in times of
adversity (Sharma and et.al, 2020).
QUESTION 2
(a) Calculation of average operating cycle in days and how this measure is put to use
 Particulars Formula Amount
Operating cycle:
COGS 5106
Average inventory 2648
Sales 8649
Average account
receivable
1428
Inventory turnover Inventory
turnover=
(COGS /Average
inventory)
1.93
Accounts
receivable turnover
Accounts
receivable
turnover=(Net sales
/ Average account
receivable)
6.06
Inventory period Inventory period= 189.29

(365/ Inventory
turnover)
Accounts
receivable period
Accounts
receivable period=
(365/ Accounts
receivable
turnover)
60.26
Operating cycle Operating cycle=
(Inventory period +
Accounts
receivable period)
249.55
◦
b) Calculation and interpretation of current and acid test ratio.
Particulars Formulas Amount
Liquidity ratio
Current assets 4076
Current liabilities 2933
Inventories 2648
Quick asset 1428
Current ratio (Current ratio= Current Asset / 1.39

Current Liabilities)
Liquid ratio (Liquid ratio= Quick Asset /
Current Liabilities)
0.49
(c) Differing type of risks and costs that could possibly be reduced by following the finance
director’s proposed proposal to reduce inventory levels
There are several financial advantages to implementing stock reduction methods,
particularly those that concentrate on surplus and outdated products. Smaller holding costs,
including such warehousing and inventory service expenses, can be achieved by carrying lower
amounts of surplus inventory throughout the supply chain. Organizations will have much more
resources to pay in quickly products or other activities of the organization with much less capital
expenditures wrapped up in products languishing in warehouses (Shahab and et.al, 2021).
Shorten supply chain: Inventory reduction will be aided by reducing supply chain waiting lists
including such manufacturing and distributing. Material keeping costs can be reduced by
controlling costs with short wait periods. Furthermore, in order to reduce total production cycle
times, WIP products must be held for shorter durations.
Order size reduction: High inventory holding costs might result from large, irregular sales for
products with variable demand. The firm profits from modest, normal community because
inventory is reduced and cash flow is improved. The greater the holding costs and the lower the
chances of product deterioration, the further inventories have on hand (Wong and Eng, 2020).
Inventory auditing: Before decreasing inventory, it's critical to review all of the options on the
market and evaluate whether any should be withdrawn. High demand fluctuation, large
manufacturing and storage expenses, and extended lead periods are all common characteristics of
certain goods. By getting rid of such things, you'll be able to lower your current stock and save
money.
Demand forecasting: Once it comes to inventory management, efficient production forecasting
is essential. This is a difficult component to manage because demand fluctuates often.
Organizations that want to minimize their inventory levels should invest in an interconnected

structure that lets for inventory management. This way, they can only acquire the resources they
have to manufacture the correct number of items (Kraus, Kraus and Osetskyi, 2020).
Supplier relationships: The importance of suppliers in ensuring the efficiency of industrial
operations cannot be overstated. After all, they have control over the materials needed for
production. It's critical to pick suppliers with quick, dependable, and precise lead times so that
they may purchase lesser amounts without worrying about stock outs. As a result, via an
effective supply chain, building a good connection with provider may help improve productivity
and minimize inventory.
Product design: Loss and inventories may be reduced by using product and process elements
that can be utilized for many goods. Whenever purchasing power made of that substance drops
abruptly, the resources can still be utilized to produce other items (SALGOTRA, KANDARI and
BAHUGUNA, 2021).
Pull based demand: By only manufacturing products when there is a need for them, a drag
demand program provides to minimize levels of inventory. This enables the firm to simply
manufacture what has been requested, removing the need for extra inventory to be stored.
QUESTION 3
a) Calculating the theoretical ex right price of an ordinary share in Mainsbury PLC.
Theoretical ex right price = (new share price * issue price+ old shares * market price)/ (New
shares+ old shares)
= (600* 54+3600*35.1)/ (600+3600)
= 158760/4200
= 37.8
Working note:
Share market price= 972/18 = 54
Number of shares (Old) = 720/0.20 = 360
New share price = 54*65% = 35.1
New number of shares = 360/6 = 600

b) Calculate the value of the rights associated with holding shares in Mainsbury PLC
Market value of each share = 54
Price to be paid for getting one share in company= 35.1
Value of rights associated with holdings = (Number of right issue / Total holdings )* (Market
value – issue price)
= (600/4200) * (54-35.1)
= 0.142*18.9
= 2.68
c) Evaluating each of the option available to investor
 Right issue for investor
Investor portfolio value = 10,000* 54 = 540000
Number of right shares to be received = (10000/6) = 1667
Price paid to buy right shares = 1667* 35.1 = 58511.7
Total number of shares after practicing the right share = 10000 + 1667 = 11667
Revised value of shares after exercising right issue = 540000 + 58511.7 = 598511.7
Price of shares post right issue = 598511.7 / 11667 = 51.29
According to this, they obtained share price if goes up then investor will be benefit & in
case of decline he will face loss.
 Selling rights of shares
= (new share price * issue price + old shares * market price) / (New shares+ old shares)
= (35.1* 51.29 + 10000 *54) / (10000 + 1667)
= 541800.279 / 11667
= 46.43
 Right to lapse calculations
The right to entitlement price = Share current price - price after right issue
= 54 - 35.1

= 18.9
d) Comparing and contrasting the various options available to business
Companies frequently require outside money, or capital, to grow their operations into
foreign markets or regions, to engage in research & innovation, or to compete. Although firms
frequently try to fund such initiatives with revenues from operating activities, it's much more
advantageous to raise additional financiers or partners.
Given the numerous variances around the world largest thousands of enterprises in different
industries, all businesses have access to a limited number of funding sources.
Retained earnings: Organizations care about profits by selling the product or service for a
higher price than it costs to manufacture. This is a corporation's most fundamental source of
finances and, presumably, the principal means of bringing money into the company. Retained
earnings, or RE, are the taxable worth that remains after costs and commitments have been met.
These cash can be utilized to support projects and expand the company. Conversely, they are
frequently used to economic aspect through stock dividends or asset sales. The rationale for this
is because raising capital from foreign funds is frequently less inexpensive for a firm, and
enticing more shareholders via shareholder rewards can be beneficial (Hitka and et.al, 2021).
Debt capital: Corporations, like persons, can take funds. This can be accomplished individually
with borrowed funds or nationally via a debt issuance. Dividend stocks are credit offerings that
enable a lot of investors to be become borrowers (or debtors) to the firm. The fact that the
principle and interests must be repaid to the borrowers is the most important factor when making
profit. Failure or bankruptcy can occur if interest is not paid or the principle is not repaid.
However, interest paid on debt is usually taxable income for the firm, and interest expenses are
often lower than that of alternative forms of funds.
Equity capital: A business can raise money by selling participation holdings in the form of
equity to customers who have become shareholders. This is referred to as equity financing. The
advantage of this technique is that, unlike creditors, investors do not have to make payments,
thus this form of capital may be obtained even if the first is not profitable. The most important
aspect is that future earnings will be shared equally among all investors. Furthermore,
bondholders have voting privileges, which implies that when a business sells new units, it loses

or diminishes part of its majority ownership. Equity capital is also one of the more costly types
of financing for a company, and it lacks some of the tax advantages that borrowing does (Van
Tuan, Huy and Duy, 2021).
QUESTION 4
a) Calculating the ratios for Crusher PLC
I. Return on capital employed Ratio
Particulars Formula 2019 2020
Operating profit 3751 3453
Total Assets-total
liabilities
14393-
4,331
=10062
23115-11621=
11494
Return on capital
employed Ratio
Operating
profit/(Tot
al Assets-
total
liabilities )
*100
37.28
%
30.04%
ii. Return on ordinary shareholder funds ratio
Particulars Formula 2019 2020
Profit for the year 2809 2332
Shareholders equity 10062 11494
Return on ordinary
shareholder funds
Profit for
the
0.279169
1513
0.2028884635

ratio year
/Sharehol
ders
equity
iii. Gross profit margin
Particulars Formula 2019 2020
Gross profit 7540 8710
Sales turnover 17640 25690
Gross profit
margin
Gross
profit
/Sales
turnover*
100
42.74% 33.90%
iv. Operating profit margin
Particulars Formula 2019 2020
Operating profit 3751 3453
Sales turnover 17640 25690
Operating profit
margin
Operating
profit/Sales
turnover*10
0
21.26% 13.44%
v. Inventories turnover period

Particulars Formula 2019 2020
COGS 17640 25690
Inventories 1840 3934
Inventories
turnover period
ratio
COGS/
Inventories
9.58695652
17
6.5302491103
vi. Settlement period for trade receivables
Particulars Formula 2019 2020
Trade
Receivables
1011 2190
Sales
turnover/Sales
turnover*365
17640 25690
Trade receivable
collection period
Trade
Receivables
/
20.919217
6871
31.1152199299
vii. Settlement period for trade payable ratio
Particulars Formula 2019 2020
Trade Payables 1605 3598
COGS 17640 25690
Trade payable
period ratio
Trade
Payables/CO
GS*365
33.21003
40136
51.1198910082

viii. Current ratio
Particular
s
Formula 2019 2020
Current
Assets
3273 6235
Current
Liabilities
4331 8846
Current
ratio.
Current
Assets/Current
Liabilities
0.7557146
156
0.704838345
ix. Acid test ratio
Particular
s
Formula 2019 2020
Quick
assets
Current Assets -
Inventories
3273-
1840=143
3
6235-3934=
2301
Current
Liabilities
4331 8846
Acid test
ratio
Quick assets/Current
Liabilities
0.3308704
687
0.2601175673
x. Gearing ratio
Particulars Formula 2019 2020

Total Debt 4331 11621
Total equity 10062 11494
Gearing ratio Total Debt/Total
equity
0.430431
3258
1.0110492431
xi. Interest cover ratio
Particulars Formula 2019 2020
Net profit 2809 2332
Interest
Payable
- 344
Interest
cover
ratio
Net profit /Interest
Payable
- 6.7790697674
xii. Earnings per share Ratio
Particulars Formula 2019 2020
Net income –
Dividend paid
4331000-
800000
= 3531000
11621000-
900000
= 10721000
Number of shares 16000 16000
Earnings per
share ratio
(Net income –
Dividend
paid)/Number of
shares
220.6875 670.0625
xiii. Dividend cover ratio

Particulars Formula 2019 2020
Earnings per
share.
1748.8855869
242
5307.42574257
43
Divided per
share
50 56.25
Dividend cover
ratio
Earnings per
share/Divided per
share
34.977711738
5
94.3542354235
b) Analysing the financial position of the Crusher PLC
As per the above ratio it has been analyzed that return on capital employed presents that in
the year of 2019 company has 37.28% which is decreasing in 2020 and reach on 30.04% so it is
presenting lower capital employed in 2020. On the other side analysis all the other ratios likes
gross profit margin, inventories turnover period, operating profit margins are decreased in the
2020 as compare of 2019. It is not presenting god performance of the business. Thus, it is
recommended that organisation must improve their performance in positive manner. Along with
compare those resources which were good in 2019 but in 2020 not so for this require to enhance
activity positively (Ali, Yousaf and Naveed, 2020).
CONCLUSION
As per the above report it has been concluded that financial management
is defined as both a science and artistry. Benefits and costs associated with
people’s choices about just how much their money they consume, how much
they save, and just how they spend their resources on a personal basis.
Financial in a globalised economy entails the same kinds of claims: how
businesses obtain money from donors, how businesses spend money in the
hopes of making a return, and how businesses determine to either return
earnings coming into the economy or redistribute them to investors.

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