Coursework: perry rose plc. please attempt all questions you are

COURSEWORK: Perry Rose Plc.

Please attempt all questions

 

You are employed by Perry Rose Finance Plc. located in Bromsgrove Surrey. You have worked for the company for 17 months after graduating with a 1st class degree from the University of Northern England in Carlisle. Your role is to advise clients on financial matters affecting the operation of their business. In your “in tray” this morning are the following issues/problems that require action and an e-mail response to each of your clients. 

In tray Item 1

1     Sally Money, the assistant accountant of your client Munic Ltd has recently been taken ill through overwork. In her absence you have been asked to deal with urgent issues. The assistant accountant has prepared some calculations of the profitability of a project, which are to be discussed soon at a Company board meeting. Her workings, which are set out below, include some errors of principle. (You can assume that the statement below includes no arithmetical errors.)

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

 

£000

£000

£000

£000

£000

£000

Sales revenue

450

470

470

470

470

Less Costs

 

 

 

 

 

 

  Materials

126

132

132

132

132

  Labour

90

94

94

94

94

  Overheads

45

47

47

47

47

  Depreciation

120

120

120

120

120

Working capital

180

Interest on working capital

27

27

27

27

27

Write-off of development costs

   

30

30

30

   

   

Total costs

180

438

450

450

420

420

Operating profit/(loss)

(180)

12

20

20

50

50

 

         

You ascertain the following additional information:

The cost of equipment contains £100,000, being the carrying amount of an old machine. If it were not used for this project it would be scrapped with a zero net realisable value. New equipment costing £500,000 will be purchased on 31 December Year 0. You should assume that all other cash flows occur at the end of the year to which they relate.

The development costs of £90,000 have already been spent.

Overheads have been costed at 50 per cent of direct labour, which is the business’s normal practice. An independent assessment has suggested that incremental overheads are likely to amount to £30,000 a year.

The business’s cost of capital is 12 per cent.

Required:

(a)     Prepare a corrected statement of the incremental cash flows arising from the project. Where you have altered the assistant’s figures you should attach a brief note explaining your alterations. (7 marks)

(b)     Calculate:

(i)The project’s payback period.

(ii)The project’s net present value as at 31 December Year 0. ((6 marks)

(c)Write a memo to the board advising on the acceptance or rejection of the project. (7 marks)

          Ignore taxation in your answer.

 

In tray Item 2

Gainsborough Fashions Ltd operates a small chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached your company on advice of how they would approach the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers’ demands. The most recent financial statements of the business are as follows:

 

 

 

Statement of financial position as at 31 May

ASSETS

£

£

Non-current assets

Property, plant and equipment

Fixtures and fittings at cost

90,000

 

  Accumulated depreciation

(23,000)

  67,000

Motor vehicles at cost

34,000

 

  Accumulated depreciation

(27,000)

    7,000

 

 

  74,000

Current assets

 

 

Inventories at cost

 

198,000

Trade receivables

 

    3,000

 

 

201,000

Total assets

 

275,000

EQUITY AND LIABILITIES

 

 

Equity

 

 

£1 ordinary shares

 

  20,000

General reserve

 

    4,000

Retained earnings

 

  17,000

 

 

  41,000

Non-current liabilities

 

 

Borrowings – loan notes repayable in just over one year’s time

 

  40,000

Current liabilities

 

 

Trade payables

 

162,000

Accrued expenses

 

  10,000

Borrowings – bank overdraft

 

  17,000

Taxation

 

    5,000

 

 

194,000

Total equity and liabilities

 

275,000

Abbreviated income statement for the year ended 31 May

 

£

Sales revenue

740,000

Operating profit

  38,000

Interest charges

(5,000)

Profit before taxation

  33,000

Taxation

(10,000)

Profit for the year

  23,000

A dividend of £23,000 was paid for the year.

Notes:

1   The loan notes are secured by personal guarantees from the directors.

2   The current overdraft bears an interest rate of 12 per cent a year.

Required:

(a)     Identify and discuss the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business. (10 marks)

(b)     State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary. (10 marks)

 

In tray Item 3-Managing director of Sparkrite calls into see you on a pre-arranged appointment

The managing director of Sparkrite Ltd, a trading business, has just received summary sets of financial statements for last year and this year. He shows you the following information:

Sparkrite Ltd

Income statements for years ended 30 September last year and this year

 

Last year

This year

 

£000

£000

£000

£000

Sales revenue

 

1,800

 

1,920

Cost of sales

 

 

 

 

  Opening inventories

160

 

200

 

  Purchases

1,120

 

1,175

 

 

1,280

 

1,375

 

  Closing inventories

(200)

 

(250)

 

 

 

(1,080)

 

(1,125)

Gross profit

 

720

 

795

Expenses

 

(680)

 

(750)

Profit for the year

 

40

 

45

Statements of financial position as at 30 September last year and this year

 

 

 

Last year

This year

 

 

 

£000

£000

Non-current assets

 

 

950

930

Current assets

 

 

 

 

Inventories

 

 

200

250

Trade receivables

 

 

375

480

Bank

 

 

  4

2

 

 

 

579

732

Total assets

 

 

1,529

1,662

Equity

 

 

 

 

Fully paid £1 ordinary shares

 

 

825

883

Retained earnings

 

 

509

554

 

 

 

1,334

1,437

Current liabilities

 

 

195

225

Total equity and liabilities

 

 

1,529

1,662

           

The finance director has expressed concern at the increase in inventories and trade receivables levels and needs advice of how to better manage the company working capital.

Required:

(a)          Show the managing director, by using the data given, how you would calculate ratios that could be used to measure inventories and trade receivables levels during last year and this year. (6 marks)

(b)          Discuss the ways in which the management of Sparkrite Ltd could exercise control over

(i)inventories levels;

(ii)Trade receivables levels. (14 marks)

 

1.   The answers to all three questions need to be written in a professional form an appropriate to the task.

2.   A report or memo would be an appropriate format.

3.   It is expected that in your answers you have a critical appraisal. This means that you would not list alternatives but offer suggestions as to the best solution. This is required for 2(b) and 3(b) in particular

 

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