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FM12

Financial Management

(For CNM Cases)

Assignment – II

Assignment Code: 2016FM12A2                                             Last Date of Submission: 30^th April 2016

                                                                                    Maximum Marks: 100

Attempt all the questions. All the questions are compulsory and carry equal marks.

                                                                         Section-A

1.         Explain the different kinds of long-term financial sources? What are the advantages and disadvantages of each of them?

2.         Write short notes on the following approaches to dividend policy affecting the value of a firm:

a)      Walters model

b)      Gordons model

c)      Modigliani-Miller Model

3.         What is the difference between gross working capital and Net working capital?  What are the sources of financing working capital? When would you follow a conservative approach to maintaining working capital and vice versa?

4.         What are the variables in a credit policy? How does the change in these variables impact the net profit? Explain with an example.

                                                                        Section-B

Paul Marriot is the director of Stortford Yachts Ltd. The company has traded for 30 years and has in the past achieved very good levels of growth and return on capital, but this is now changing. In recent time it has failed to introduce new product lines, relying on traditional products and little has been invested in Research or Product Development. You are a business planning consultant for a firm of Management Consultants. Stortford Yachts is one of your clients. In recent times the business has experienced increased turnover but a downturn in overall performance. Paul Marriot has had a meeting with your Director and he has stated that he wants to introduce tighter management control within the company by introducing a system of responsibility accounting. You receive the following memo from your Director, Pauline Changer, regarding this case. Memorandum To: Business Planning Assistant Date: 21st May 2013 From: Pauline Changer, Director Subject: Stortford Yachts Ltd. - accounts information You are aware that I met with Paul Marriot yesterday and that he is concerned with the latest results shown in the final accounts that have recently been prepared at year end. The file attached contains a summary of the company's abbreviated profit statements and balance sheets for the past three years; together with additional information and performance indicators for their business sector as a whole for the period under review. I would like you to examine this information and meet with me on Friday morning to discuss the form and presentation of a detailed financial analysis of the company over the three-year period. Signed: P. Changer Financial information on Stortford Yachts Ltd. Summary profit statements $m $m $m 2010 2011 2012 Sales turnover 5.12 5.93 6.32 Operating costs 4.17 4.43 5.82 Operating profit before tax 0.95 1.5 0.5 Taxation(30%) 0.665 1.05 0.35 Profit after tax 0.285 0.45 0.15 Dividends 0.12 0.16 0.08 Retained profit 0.165 0.29 0.07 N.B. The firm's detailed breakdown of costs is as follows: Years 2010 2011 2012 Labour costs 0.93 0.98 1.25 Distribution costs 0.44 0.49 0.61 Administration costs 0.19 0.22 0.27 2. Summary balance sheets $m $m $m 2010 2011 2012 Fixed assets 2.40 2.77 2.88 Current assets Stocks: Raw materials 0.09 0.12 0.15 Finished goods 0.40 0.43 0.45 Debtors 1.14 1.32 1.84 Bank 0.03 0.04 0.05 1.66 1.91 2.49 Less Current liabilities 1.35 1.56 1.90 Net current assets 0.31 0.35 0.59 2.71 3.12 3.47 Capital and reserves 0.5 0.91 1.26 Bank loans 2.21 2.21 2.21 2.71 3.12 3.47 3. Yacht Builders Federation Average ratios for federation members 2012 % Return on capital employed 26.0% Asset turnover 1.79 times Net profit margin 14.5% Current ratio 1.5:1 Acid test ratio 1.03:1 Debtors collection period 83 days Gearing ratio 32.0% Labour cost % of sales 18.1% Operating cost % of sales 85.5% Distribution costs % of sales 9.5% Admin costs % of sales 4.5% Questions In your role of planning assistant you are to prepare an analysis of the company's figures over the three-year period using the performance criteria listed in the inter-firm comparison table. 1. Calculate all the ratios given in the average ratios for federation members for 2010, 2011 and 2012. 2. Prepare a detailed report on the company's performance in terms of profitability and liquidity compared with the average of the sector over the period.