Sample Managing Financial Resources and Decisions Assignment PDF

Managing Financial
Resources and Decisions

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1. Advantages and disadvantages of listing on London Stock Exchange..............................1
2. Discussing methods of obtaining a listing in the exchange................................................3
3. Explaining methods of raising capital in the exchange......................................................3
TASK 2............................................................................................................................................4
2.1 A) Calculation of cost of ordinary Share Capital.............................................................4
B) Computation of cost of preference Share Capital..............................................................5
C) Calculation of cost of debenture Capital after tax.............................................................5
D) Computation of weighted average cost of Capital............................................................6
2.2 Ascertaining the importance of financial planning..........................................................6
2.3 Analysing the informational needs of Directors, senior managers and junior managers in
the organisation......................................................................................................................7
2.4 Impacts of finance in financial statements.......................................................................7
TASK 3............................................................................................................................................8
3.2 1. Calculation of fixed overhead absorption rate per direct labour hour..........................8
2. Calculation of fixed overhead cost per unit for each of the items......................................8
3. Computation of budgeted production cost per unit for each product.................................8
4. Calculation of budgeted selling price per unit for each item..............................................8
3.1 1. Production Budget........................................................................................................8
2. Budgeted Profit and Loss Account.....................................................................................9
3. Level of sales required to generate profits.........................................................................9
3.3 A) Calculation of investment appraisal techniques..........................................................9
B) Recommendation to invest in the project........................................................................11
TASK 4..........................................................................................................................................11
4.1 Main financial statements produced by organisation and type of information provided by
each statement......................................................................................................................11
4.2 Different formats of Income Statements used by various sectors..................................12
4.3 A) Calculation of financial ratios for the firm for 2015 and 2016.................................14

B) Explaining computed ratios of Wordsworth Plc.............................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Managing financial resources and decisions are important for the company to attain
benefits. Present report deals with scenarios in which financial resources are analysed and
viability of performance of company is judged. Calculation of WACC, financial ratios and
capital appraisal techniques are made in effective way. Moreover, discussion about LSE is also
made. Moreover, budget is prepared for the firm. Thus, it can be said that company is benefited
by managing financial resources and as such, immense benefits are attained with much ease.
Moreover, the study is comprises with the effective accounting financial techniques which in
turn helps in bringing the satisfactory rise in the revenue and the growth of business. There will e
presentation of various forecasted budgets such as production, sales and income statements for
the period. That enables professionals in terms of analysing the benefits and profitability of
business in the coming time.
TASK 1
1. Advantages and disadvantages of listing on London Stock Exchange
London Stock Exchange (LSE) is one of the oldest and biggest stock exchange where
securities are traded in. There are various advantages and disadvantages of listing on the stock
exchange. These are discussed below-
Advantages
1. One of the main advantage of listing on LSE is that access to the wider market and as
such, more capital can be garnered by raising shares through public offering. Thus, Milner
Chemicals Plc may be able to finance its activities in the best possible manner.
2. Listing on stock exchange helps to spread ownership risk among shareholders in
effective way. Furthermore, liquidity position can be enhanced in a better way. Moreover,
investors' will invest in the shares of company as it offers more security than organisation not
listed in the exchange (Rockey and Collins, 2010).
3. Another advantage is that Milner Chemicals Plc may be able to acquire organisation in
order to double its growth and reduce competition in the market in effective way. Thus,
organisation can easily acquire another firm by listing on the stock market.
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4. Shareholders' base can be broaden by the firm by listing as organisation is able to raise
capital by effectively as more of the investors will invest in the securities of the company in the
best possible manner.
5. Next advantage of having listed in the stock exchange is that employees become
motivated as they may be provided with the ESOS (Employees Stock Option Scheme) and thus,
they are encouraged in a better way.
Disadvantages
1. Listing on stock exchange is helpful for company but has certain disadvantages as
well. One of the main disadvantage is that market susceptibility may be inculcated which may
ruin market price of shares as control is not initiated and thus, organisation has weakened
liquidity position. It would be disadvantageous to Milner Chemicals Plc as it is small company
which may suffer from the liquidity quite adversely (Snell, Morris and Bohlander, 2015).
2. Loss of potential control upon the exchange is attained as shareholders' wants to
achieve higher returns on the investment made by them and as a result, organisation becomes
under pressure and liquidity position is affected largely.
3. Another disadvantage of listing is that various formalities are required to be accounted
for by the organisation. In simpler words, floating process, listing on subsequent basis and
related disclosures affects firm as it has to comply with such formalities which are not found in
the case of private company.
4. Privacy of organisation is lost as it has to provide greater disclosures to the external
shareholders so that they may be able to take enhanced decisions regarding the company. This
helps them to take decision whether to invest in organisation or not. Moreover, directors has to
provide information and privacy is lost which they can accomplish in private firm with much
ease (Vassolo, De Castro and Gomez-Mejia, 2011).
5. There are various costs and fees which are required to be paid by the company when it
is being listed on LSE and as such, these increases overall expenses of firm. These includes
additional capital, floatation and existing listing expenses to name a few.
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2. Discussing methods of obtaining a listing in the exchange
There are various methods by which Milner Chemicals Plc can easily avail the listing on
LSE. Mainly, in LSE, there are two markets where listing could be possible through use of GDR
(Global Depository Receipts). They are as follows-
1. Main Market-
It is one of the market where company chooses to list on Main market and the
organisation has to follow the rules of EU markets and rules enacted by FSA, listing and
disclosure rules and all the risk factors in the best possible manner. The requirements of such
listing are prospectus prepared according to prospectus drive which includes rules of IFRS as
well. Three years of history of trading is required to be fulfill by Milner Chemicals Plc and to
provided to Main market for easing off listing procedure. Minimum of 25 % of floated DR in
hands of public and capitalisation of GDR of minimum of 700,000.
2. The Professional Securities Market-
It is another market which can be availed by company in effective way. It is operated by
LSE with the scope of Recognised Investment Exchange. This market is accessible to the
wholesale investors which likes to invest in optimum quantity in the best possible manner. The
listing requirements of PSM is different. It requires past three years of financial statements which
should be audited and minimum of market capitalisation of 700,000 which is same as Main
market rules. Moreover, GAAP guidelines should be utilised in formulating the prospectus with
much ease (Post and Byron, 2015).
3. Explaining methods of raising capital in the exchange
There are various methods of raising capital in LSE. They are discussed below-
1. IPO (Initial Public Offerings)-
It is one of the common method raising of capital in effective way. It is required that
Milner Chemicals Plc can easily list on LSE and as such, it can issue initial shares to the public
to effectively garner money for business operations. It is termed as initial offering as
organisation issues shares for the first time and investors' subscribe the same and adequate
capital may be made available to firm so that it may easily meet out operational requirements
quite effectually. Moreover, Milner Chemicals Plc which is looking forward to list on LSE can
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take advantage of the same and impart offerings in the primary market (Przychodzen and
Przychodzen, 2015).
2. AIM (Alternative Investment Market)-
It is another useful method of obtaining finance from the market in the best possible way.
It was launched by LSE to effectively help smaller companies to take access to capital market
and as such, float shares quite effectually. It is more flexible system for raising finance by
floating share in the market and avail loan quite easily. It is quite useful for less viable
organisation and as such, it may be able to raise fund with much ease.
TASK 2
2.1 A) Calculation of cost of ordinary Share Capital
Share Price 200
Shares Outstanding 4500
Market Cap (E) 900000
Stock Beta 0.91
Risk Free Rate 0.03
(e.g. return on 10
year treasury bonds)
Required Market
Return
0.09
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Market Risk
Premium
0.06
Cost of Equity 8.5%
B) Computation of cost of preference Share Capital
Preferred Stock Price 120
P Shares Outstanding 4500
Market Value (P) 540000
Dividend on preferred stock 8.00%
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Cost of Preferred Stock 6.7%
C) Calculation of cost of debenture Capital after tax
Debt (10 %) 1000000
Maturity year 10
Corporate tax @ 20
%
0.2
interest rate
applicable
0.1
Cost of debt 8.00%
D) Computation of weighted average cost of Capital
Weights 2440000
weight of equity 0.368852459
weight of preferred stock 0.221311475
Weight of Debt 0.409836066
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cost of equity 0.085
cost of preferred stock 0.067
cost of debt 0.08
Equity 0.031352459
Preference 0.014827869
Debt 0.032786885
WACC 8%
2.2 Ascertaining the importance of financial planning
In relation with analysing the needs and requirements of financial planing is that it
facilitate appropriate information regrading the financial operations as well as management of
operations. The accounting professionals in an entity will have accurate demonstration of the
cots and expenditures made by them in upcoming period. It enables the professional to have
effective budgetary plans which will be helpful in analysing the profitability of the proposed
future plans. The proper administration and execution over the costs and operational
expenditures will be quite effective and helpful to the firm as to have better financial control. It
will be effective in managing the operational gains of the businesses. It brings the appropriate
information to the business professionals as to have risen in the income and operational
practices. The managerial professionals will become able to have effective control over short
terms and long terms planning. Thus, the business will be beneficial as to meet the debt
requirements on the required time.
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2.3 Analysing the informational needs of Directors, senior managers and junior managers in the
organisation.
By doing assessment, it has identified that informational need of decision makers vary
significantly in the following manner:
Ø Directors: In the context of business unit, directors lay high level of emphasis on evaluating
all financial statements with the motive to develop competent strategic framework.
Ø Senior managers: Higher level managers uses final accounts to assess whether performance
has improved or deteriorated over the time frame. Referring such information managers can set
suitable standards or benchmarks for the upcoming time period.
Ø Junior managers: Personnel or employees work at this level make focus on assessing or
evaluating profitability statements. This in turn assists them in making estimation about salary,
incentives and future growth in monetary terms.
2.4 Impacts of finance in financial statements
The main importance of the financial disclosure is to make the appropriate
communication of the financial data set. However, it will be assistive and helpful to the business
in terms of gathering the large numbers of equity holders or investors. Thus, the disclosure and
the financial statements comprises with the financial performance made by the business over the
period. Therefore, it brings the necessary changes into business activities which will be cost
effective and helpful to the business in terms of generating the appropriate amount of revenue for
the future period. There has been various positive impacts such as rise in the market value of the
firm such as stock prices will be increased. It will also be helpful in terms of financial decision
making as well as analysing the costs of the business. Moreover, it will be helpful and beneficial
to the business professionals as to have satisfactory control over the revenue and the operations
of entity. it can be summrized from the evaluation that selected funding sources have significant
impact on financial statements. Along with this, it can be depicted from the evaluation that by
buying machine business unit would become able to meet goals and objectives. Apart from this,
it can be stated from the assessment that financial statements provide deeper insight about
liquidity, profitability and solvency position. It can be seen in the report that finnacial position
and performance of Wordworth plc is good in the concerned period.
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TASK 3
3.2 1. Calculation of fixed overhead absorption rate per direct labour hour
2. Calculation of fixed overhead cost per unit for each of the items
3. Computation of budgeted production cost per unit for each product
4. Calculation of budgeted selling price per unit for each item
3.1 1. Production Budget
production budget 0 2018 2019 2020 2021
sales 28000 32000 35000 38000
Closing inventory required 0 1000 2500 3200 2800
less: Opening inventories 800 2000 2800 2500
Production required 28200 32500 35400 38300
Reject allowances 4.00% 1128 1300 1416 1532
Budgeted production 29328 33800 36816 39832
2. Budgeted Profit and Loss Account
Particulars 0 2018 2019 2020 2021
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Illustration 1: Calculation of overheads

Sales revenue 20000 34000 36000 40000
Less: COGS 950 1050 1260 1580
Gross profit 19050 32950 34740 38420
Operating expenses
Selling and Administration 1200 750 1800 980
Advertisement expenses 300 300 300 300
insurance 550 650 750 100
Salaries to employees 1200 1200 1200 1200
rent 400 400 400 400
Total Operating expenses 3650 3300 4450 2980
Net operating profit 15400 29650 30290 35440
less: Tax 30% 4620 8895 9087 10632
Net profit 10780 20755 21203 24808
3. Level of sales required to generate profits
sales budget 2018 2019 2020 2021
Expected unit sales 125000 132000 138000 142000
Sales price 200 200 200 200
Total sales 25000000 26400000 27600000 28400000
3.3 A) Calculation of investment appraisal techniques
Calculation of NPV
Year Net Cash inflows
Present value
discounting factor @
10%
Discounted Cash
Flow (DCF)
0 1000000
1 240000 0.909 218181
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2 200000 0.826 165289
3 280000 0.751 210368
4 320000 0.683 218564
5 360000 0.621 223531
1035935
Initial Investment 1000000
NPV 35935
Calculation of Payback period
Year Cash flows
Cumulative
Cash Flow
(CCF)
0
1 240000 240000
2 200000 440000
3 280000 720000
4 320000 1040000
5 360000 1400000
Total cash
flows 1400000
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Initial
investment 1000000
= 3 + 1040000 – 720000 / 720000
= 3 +1
= 4 years
Calculation of IRR
Year Cash flows
0 -1000000
1 240000
2 200000
3 280000
4 320000
5 360000
IRR 11.28%
B) Recommendation to invest in the project
It is recommended to invest money by purchasing new machinery as NPV is positive
amounting to 35935. Moreover, payback period is 4 years which also meets the criteria for
checking viability of project. IRR is 11.28 % which is good and investment should be made in it.
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TASK 4
4.1 Main financial statements produced by organisation and type of information provided by
each statement
The main financials of the organisation are balance sheet, income statement, cash flow
statements. Balance sheet provides information related to assets and liabilities held by firm in
effective way. Income statement shows revenue and expenses incurred in particular year. On the
other hand, cash flow statement implies whether firm has adequate liquidity position or not from
operating, investing and financing activities.
4.2 Different formats of Income Statements used by various sectors
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Illustration 2: Manufacturing firm

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Illustration 3: Clubs statement

4.3 A) Calculation of financial ratios for the firm for 2015 and 2016
Particulars Formula 2015 2016
Current ratio
Current assets /
Current Liabilities 1.43 : 1 1.26: 1
Quick ratio Liquid assets / Current 0.85: 1 0.77: 1
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Ill
ustration 4: Trading firm

liabilities
Gross profit margin
Gross profit / net sales
* 100 33.93% 27.44%
Profit margin EBIT / net sales * 100 5.46% 0.14%
Return on total assets
EBIT (Earnings
Before Interest and
Taxes) / Net assets 1.74 2.27
Inventory Turnover
ratio
COGS / Average
inventory 372 days 137 days
Average Collection
Period
365 / Receivables
turnover 372 days 151 days
Times Interest Earned
EBIT / Interest
charges 8.7 times 0.44 times
Gearing ratio
Long term borrowings
/ Equity 7.43% 1.53%
B) Explaining computed ratios of Wordsworth Plc
The financial ratios of firm is calculated which shows overall financial position quite
easily. In relation to this, current ratio in the financial year 2015 was 1.43 which slighlty
decreased to 1.26. It can be assesed that liquidity positon of Wordsworth Plc is good enough and
will be able to pay-off short-term liabilities within stipulated time of one year. Quick ratio is
good as well which shows that ratio is good of organisation. On the other hand, gross profit
margin was 33.93 % in 2015 and decreased to 27.44 % in 2016. It is not good as firm needs to
initiate control upon operational expenses. Profit margin (On EBT) was 5.46 % in 2015,
decreased to 0.14 % which means that profitability position of firm is not good. Return on total
assets' ratio was 1.74 % of the company in 2015 and in 2.27 % in 2016. On the other side,
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inventory turnover ratio was 372 days in the financial year 2015 and decreased to 137 days
which means that organisation is quickly replenished in effective way (Somsuk and
Laosirihongthong, 2014). The times interest earned is 8.7 times and decreased to 0.44 times in
2016. Gearing ratio has been low in 2017 as it was 7.43% and reduced to 1.53 %. Thus, it can be
said that firm is not performing well and required to implement better strategies to beat average
industry ratios.
CONCLUSION
By summing up this report, it has been concluded that through listing on London Stock
exchange Milner Chemicals Plc can obtain funds by issuing equity shares to the public. Besisdes
thsi, it can be inferred that financial planning is higjhly prominent which in turn helps in making
optimum use of financial resources. It has been articulated that informational needs of decision
makers vary to a great extent. Further, it can be summrized from the evaluation that selected
funding sources have significant impact on financial statements. Along with this, it can be
depicted from the evaluation that by buying machine business unit would become able to meet
goals and objectives. Apart from this, it can be stated from the assessment that financial
statements provide deeper insight about liquidity, profitability and solvency position. It can be
seen in the report that finnacial position and performance of Wordworth plc is good in the
concerned period. Hereby it can be concluded that managing financial resources are required so
that proper utilisation of resources should be made quite effectually. The cost of capital and
related calculations are done for company. Moreover, investment appraisal techniques and
financial ratios are applied to analyse financial position of company with much ease.
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