Reference no: EM132188227

Part A - Fridge Freeze

You are a financial analyst at FridgeFeeze Plc; a public limited company specialising in manufacturing and distributing refrigeration equipment. The Board of Directors have looked into the financial statements of the company for the last two years and have raised concernsregarding both the company's profitability and liquidity. The financial statements of FridgeFeeze for the last two years are given below:

Statement of Comprehensive Income for the year ended 31 December

	2018			2017
	£000	£000		£000	£000
Revenue		38,550			29,950
Less: Cost of sales:
Opening Inventory	3,875			4,535
Manufacturing costs	22,140			13,250
	26,015			17,785
Less: Closing Inventory	(6,225)			(3,875)
		(19,790)			(13,910)
Gross profit		18,760			16,040
Less: Expenses
Selling & distribution expenses	8,135			4,380
Administrative expenses	2,100			990
Bad debts written off	1,040			565
		(11,275)			(5,935)
Operating profit		7,485			10,105
Less: Interest payable		(1,690)			(380)
Profit before tax		5,795			9,725
Less: Income tax		(900)			(1,920)
Profit after tax		4,895			7,805
Less: Dividends paid		(2,100)			(2,100)
Retained profit for the year		2,795			5,705

Statement of Financial Position as at 31 December

	2018			2017
	£000	£000		£000	£000
Non-current assets (net)
Land and building		24,590			19,280
Equipment		4,380			3,200
Motor vehicles		1,900			1,650
		30,870			24,130
Current assets
Inventory	6,225			3,875
Trade Receivables	5,900			4,500
Cash	0			560
	12,125			8,935
Current liabilities
Trade Payables	(5,100)			(4,885)
Taxation	(1200)			(1,490)
Bank overdraft	(2,180)			0
Net current assets		3,645			2,560
		34,515			26,690
Non-current liabilities
Loan stock		(4,575)			(1,250)
		29,940			25,440
Equity
Ordinary shares of £1 each		26,035			24,330
Accumulated profit		3,905			1,110
		29,940			25,440

Required:

1. Prepare a report for the Board of FridgeFeeze Plc. that evaluates the performance of FridgeFeeze in relation to profitability, liquidity, gearing, asset utilisation, and investor potential. Your report must be supported by the calculation of relevant ratios in the five evaluation areas mentioned above.

2. Calculate the Working Capital Cycle in days for FridgeFeeze Plc based on the information above, assuming 365 days, for the years 2015 and 2014AND briefly comment on the company's liquidity position in 2018 compared to 2017. (round to the nearest day)

3. Critically evaluate the limitations of using ratio analysis for both cross-sectional and time-series comparisons.

All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.

Part B - WashbugLtd

Washbug Ltd is specialized in producing and selling domestic washing machines. In 2017, the manufacturing cost per unit included:

	£
Direct material	125
Direct labor (20 minutes per unit)	15/hour
Variable manufacturing overhead	20
Variable selling expenses	15
Variable administrative expenses	10

Fixed costs for the year ended 31 December 2017 were:

	£000
Fixed manufacturing	1,650
Fixed selling and distribution	2,850
Fixed administrative	930

The company produced and sold 45,000 units at £300 per unit.

In 2018, management has decided to increase the selling price by 20% and to maintain the same contribution margin ratio as last year. This increase in price is to meet an increase of £1,450,000 in fixed costs in 2015. The company has produced and sold the same quantity in 2018 as last year.

Required:

1) Calculate the break-even point and margin of safety in both units and revenue for the two years, 2017 and 2018, and briefly analyse the results.

2) Critically evaluate the key assumptions that underpin the break-even model, assessing and analysing whether the model can be applied within the context of today's global business environment.

All calculations should be clearly shown including all appropriate workings, and should be made to the nearest £000 or two decimal places where required.

Part C

Required:

1. Financial managers can fund potential investments and expansion plans through accessing a range of differing sources of finance. Explain and critically evaluate a single source of bothinternal and external finance that could be used by companies to finance further investment programmes.

2. Critically evaluate the key benefits and limitations of each of the differing investment appraisal techniques, supporting the response with relevant academic research as to whether the differing techniques are applied in practice.