Preparation of budgets and working capital management
Course:- Financial Management
Reference No.:- EM13840324

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Question 1

Investment appraisal

The following information relates to three possible capital expenditure projects that are being considered by Wilson plc. Due to capital rationing, only one of the three projects can be pursued.


Project A

Project B

Project C





Initial cost




Expected life

5 years

5 years

5 years

Scrap value expected




Expected cash inflows:




End of year 1




















Additional information:

i. Wilson plc estimates its cost of capital to be 18%.
ii. £34,000 depreciation is charged to Project A each year.
iii. £37,400 depreciation is charged to project B each year.
iv. £37,200 depreciation is charged to Project C each year.


(a) Calculate for each project:

i) The payback period

ii) The net present value

iii) The accounting rate of return using average investment

(b) Explain which of the three investments should be accepted based on the results of each of the three capital expenditure appraisal techniques.

(c) Identify and evaluate the non-discounting techniques used in part (a).

Question 2

Financial Statement Analysis

Below is a link to Carr's Milling Industries Plc's annual report for the year ending 2014.


With reference to appropriate ratios and contextual analysis, including comparative performance with one other UK retailer, please assess the company's performance in a formal report, intended for existing stockholders in the company.

You should select and calculate three financial ratios for use in each of the following aspects of financial performance and position:

- Profitability
- Liquidity
- Efficiency
- Capital structure
- The investors' specific perspective

Question 3

Earnings per share

At 1 July 2013, Radcliffe plc had 1 million £1 ordinary shares in issue. On 1 March 2014, Radcliffe plc made a 1 for 4 rights issue for £3.70 per share. The market price of one Radcliffe plc ordinary share at that date, immediately before the rights issue, was £4.30. Profit attributable to ordinary equity holders for the year ended 30 June 2014 was £1,333,000.

a) Calculate Radcliffe plc's consolidated basic earnings per share for the year ended 30 June 2014.

On 1 July 2013 Baker plc issued 1 million 5% convertible redeemable preference shares at par (nominal value £1 each). The preference shares are redeemable at par for cash on 30 June 2017, or are convertible into 200,000 new £1 ordinary shares at that date. The preference dividend is paid on 30 June each year. Profit after tax is £406,617. Interest charge for year ended 30 June 2014 for the redeemable convertible preference shares is £65,258. The number of £1 ordinary shares in issue at 30 June 2013 is 4 million.

b) Calculate the basic EPS and the diluted EPS and explain its relevance to the ordinary shareholders.

c) Critically evaluate the use of earnings per share as a guide to investor decision making.

Question 4

Preparation of budgets and working capital management

Dilber Ltd is a small retail business that operates in the United Kingdom. The company was formed in December 2014 and commenced its new year on 1 January 2015 with £25,000 in share capital. Dilber Ltd also has £14,000 in the bank and £15,000 of finished goods stock for resale. This information had already been recorded in the accounting records of Dilber Ltd. Dilber Ltd had debentures of £4,000 as at 1 January 2015.

The company has agreed a bank overdraft facility of up to £15,000.

The following transactions had been budgeted for the first 6 months of 2015.

Sales of goods to debtors in the 6 months to June 2015 were expected to be £160,000 in total, and transacted as follows:

Jan   Feb   Mar   Apr   May   Jun 

£   £   £   £   £   £  
Sales  20,000 18,000 20,000 25,000 32,000 45,000

Gross profit margins are always 35% of sales and it was Dilber Ltd's policy to have sufficient finished goods stock at the end of each month to service the following month's cost of sales. The sales forecast for July 2015 was £55,000.

Purchases of goods for resale in the six months to June 2015, based on the above information, were £114,750 and were budgeted to be as follows:

Jan   Feb   Mar   Apr   May   Jun 

£   £   £   £   £   £  
Purchases     9,700 13,000 16,250 20,800 29,250 25,750

Other transactions:

- Plant and equipment was to be purchased for cash, £10,000, in January 2015, and £20,000 in June 2015.

- The plant and equipment depreciation for the 6 month period is included in the other operating costs, below;

- Director's salary £2,000 per month was to be paid in cash January to June 2015;

- Sales assistant's wages £1,000 per month was to be paid in cash January to June 2015;

- Other operating costs, £2,200 per month, include depreciation on plant and equipment, £100 per month. The cash operating expenses were to be paid in cash, each month, January to June 2015;

- Corporation tax of £652 was to be paid in June 2015;

- Bank finance charges of £15 were to be incurred in February 2015;

- Debtors were budgeted to pay in full one month after the month of the sale. In this respect sales made in January 2015, for example, would be paid for in February 2015

- Creditors were to be paid in full, two months after the purchase of stock. In this respect purchases of stock made in January 2015 would be paid for in March 2015.

- A dividend of £1,400 was to be paid during June 2015.


(a) For the 6 months period to June 2015, produce the following for Dilber Ltd

(i) A monthly cash budget;

(ii) A budgeted income statement for the year ended 30 June 2015; and

(iii) A budgeted statement of financial position as at 30 June 2015

The cash flow forecast must indicate the cash in hand or overdrawn at the end of each month.

(b) Dilber Ltd is concerned about its management of working capital. Prepare a short set of briefing notes entitled ‘How to improve the working capital position of Dilber Ltd outlining three strategies for improving the working capital position.

Question 5

Working Capital Management and Variance Analysis

Cost volume profit (CVP) analysis can be useful in helping to support a number of important decisions.

However, the CVP technique can only be a very simplistic analysis of short-term cost behaviour and suffers from a number of limitations.


Evaluate the CVP technique and explain the limitations of its use in the context of both the different interpretations of the CVP technique offered by the economist's model of CVP and other limitations.


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Carr’s Milling is seen to have a high operational efficiency along-with sound liquidity position. Though there are opportunities for the company to control cost and improve profitability by implementing a cost effectiveness program as well as further improve on its receivables management, the overall performance and operations has been relatively better than its competitor.

At present the shares are seen to be trading at a lower P/E multiple vis-à-vis its peers and given a solid operational performance coupled with a substantially higher ROE, the shares of the company looks to be a good long term investment opportunity for investors.

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