Reference no: EM133182675

Financial Analysis

You have collected the attached information from her to do the financial analysis for meaningful decisions.

The company wants to maintain its existing capital structure policy of 50% debt, 10% preferred equity and 40% common equity for this new investment.

Ms Madison has requested you to make a report based on the following queries so that she can present it at the next board meeting.

1. What will be the cost for each source of financing? Consider both DDM (i.e. Dividend Discount Model) and CAPM (i.e. Capital Asset Pricing Model) method for common equity. Please provide your comments on the assumptions of each approach and their merits and limitations.

2. Determine the optimum cost of capital using the Weighted Average Cost of Capital (WACC) approach for target capital structure. (Hints: Ms Madison would prefer to use CAPM over DDM).

3. Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this possible restructuring decision. (Hints: Use the WACC as your discount rate to evaluate the investment projects)

4. Assume that the product lifecycle of five years is viewed as a safe bet, but the scale of demand for the product is highly uncertain, mainly due to possible BREXIT and COVID-
19. Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.

5. Explain how the BREXIT could affect the UK automobile manufacturing sector and the possible strategic changes required in this industry to cope with the risk?

Financial Analysis for internal management:

The management accounting team of XYZ plc also came up with some questions and requested you to explain/answer them for the upcoming board meeting:

Question 1. A chain of XYZ plc, BHealthy Ltd is a wholesale manufacturer of healthy foodstuffs. Because of a series of machine-related accidents at one of its factories, working practices have been revised and altered. It has resulted in a reduction in the number of labour hours available next period to 60,000. Four ready-made meals are produced in this factory and estimated data for the next accounting period are as follows:

Product	S1	S2	S3	S4
Maximum Demand (units)	8,000	6,500	4,800	3,200

Selling and costing information (per unit)

	£	£	£	£
Selling price	80	110	145	170
Direct materials	12	30	35	40
Direct labours (Labour rate = £5/hr)	16	20	15	20
Variable overhead	8	10	14	16
Selling overhead	4	4	4	4

The team wants to know about the limiting factor and requested you to help calculate the maximum profit which can be achieved in the period?

They also asked to provide TWO alternatives BHealthy Ltd has to overcome the limiting factor?

Question 2. Another chain, Phase3 Sports Club, is opening an exquisite new gym with a luxury spa within the city centre of Leeds as part of its growth strategy, but it needs to attract new members to make sure it survives. Over the last few years, demand for sports facilities has been rising as more and more consumers become health conscious, resulting in a significant increase in the number of sports clubs within the city of Leeds. Phase3 club has to come up with the right pricing strategy to attract and retain customers to achieve their financial objectives.

The budgeted fixed costs (for the rental of the building and sports equipment) for the first month are £7,500, and they are expected to be 27.27% of the total overheads at breakeven. The managers estimate that each member will use about £200 in resources over a year. In addition, each club member will be charged a £275 annual membership fee.

The management accounting team has the following questions for you:
a. How many members will the club need to have to break even?
b. Calculate the margin of safety percentage if Phase3 attracts 200 or 300 members in the first month.
c. If Phase3 wishes to make a profit of £2,400, how many members should it target?
d. The managers decide that a £275 fee is too high. What would happen if they reduced the membership fee to £245? Make the adjustment and recalculate the contribution, breakeven point, and margin of safety percentages at output levels stated in b) and advise management of the feasibility of a price reduction.
e. Explain the limitations of Cost Volume Profit (CVP) analysis.

Question 3. Budget planning is an essential process for an organisation, with many advantages. However, there can be negative aspects to the budgeting process. The management accounting team of XYZ plc wants you to discuss and provide examples of both of these aspects of budgeting.