Reference no: EM131269215

Question 1

Presented below are the simplified Consolidated Statement of Comprehensive Income and Consolidated Balance Sheet of Barratt Developments Plc for the financial years 2013 to 2015.

Statement of Comprehensive Income for the Year ended 31st December	2015	2014	2013
Revenue	3,759.5	3,157.0	2,606.2
Cost of Revenue	(3,045.2)	(2,627.6)	(2,247.0)
Gross Profit	714.3	529.4	359.2
Selling/General/Admin. Expenses	(137.5)	(119.6)	(106.5)
Unusual Income (Expense)	0.0	0.0	(87.5)
Operating Income	576.8	409.8	165.2
Finance Expenses	(19.1)	(21.3)	(37.7)
Finance Income	45.9	43.8	10.9
Other Expenses	(38.1)	(41.7)	(33.9)
Net Income Before Taxes	565.5	390.6	104.5
Taxes	(115.2)	(85.2)	(29.8)
Net Income	450.3	305.4	74.7

Comprehensive Statement of Financial Position as of 31st December	2015	2014	2013
Current Assets
Cash and Short Term Investments	370.6	275.5	295.7
Trade Receivables	146.2	100.0	67.3
Inventory	4,173.6	3,508.6	3,209.8
Prepaid Expenses	12.6	11.8	7.9
Other Current Assets	--	0.0	25.6
Total Current Assets	4,703.0	3,895.9	3,606.3
Non-Current Assets
Property, Plant and Equipment	8.2	6.1	3.4
Goodwill	792.2	792.2	792.2
Intangibles	100.0	100.0	100.0
Long Term Investments	296.8	321.2	251.9
Other Long Term Assets	10.9	28.9	100.6
Total Non-Current Assets	1,208.1	1,248.4	1,248.1
Total Assets	5,911.1	5,144.3	4,854.4
Current Liabilities
Trade Payable	897.9	655.6	620.7
Accrued Expenses	359.4	334.3	326.1
Notes Payable/Short Term Debt	0.0	33.3	4.1
Current Port. of LT Debt/Capital Leases	13.2	5.1	176.1
Other Current liabilities	141.9	131.8	69.0
Total Current Liabilities	1,412.4	1,160.1	1,196.0
Non-Current Liabilities
Total Long Term Debt	163.3	161.7	166.6
Minority Interest	10.1	8.0	--
Other Liabilities	622.9	468.5	418.6
Total Non-Current Liabilities	796.3	638.2	585.2
Total Liabilities	2,208.7	1,798.3	1,781.2
Shareholders' Equity
Common Stock	99.5	98.5	98.0
Additional Paid-In Capital	219.1	214.8	213.4
Retained Earnings	3,383.8	3,032.7	2,761.8
Total Equity	3,702.4	3,346.0	3,073.2
Total Liabilities & Shareholders' Equity	5,911.1	5,144.3	4,854.4

Required

Prepare a business report for the board of directors which analyses the performance of Barratt Developments Plc over the financial years 2013 to 2015 and recommend any action the board should take.

Your report should utilise key ratios, horizontal and vertical analysis.

Question 2

You have started working at Fintech Plc as a finance director and have reviewed a recent investment proposal for producing and selling a new product which was rejected because it did not earn the company's target return on capital employed of 11%

The appraisal appeared as follows:

Year		0	1	2	3	4
Sales			1,600	1,800	1,884	1,200
Direct materials			(400)	(450)	(500)	(250)
Direct Labour			(600)	(675)	(750)	(375)
Overheads			(200)	(200)	(200)	(200)
Interest			(80)	(80)	(80)	(80)
Depreciation			(225)	(225)	(225)	(225)
Profit			95	170	129	70
Initial Outlay
Working Capital		150
Machinery		900
Feasibility Study		80
Market Research		70
		1,200

ROCE = Average Annual Profit / Initial Investment = 116000/1200000 = 9.67%

Following additional information is provided to you:

1. The amount of overheads charged to the project includes both fixed production overheads and variable production overheads. About half of the overheads are fixed, and half vary with the level of production.

2. The feasibility study was paid for before the project commenced; the market research study has been completed and been paid off.

3. The market research study had recommended that the new product should be launched with a major marketing campaign costing £150,000 immediately before sales begin. This had been ignored in the above appraisal.

4. The company's cost of capital is 14%

Use following discount rates @ 14%:

Year	0	1	2	3	4
DCF	1	0.88	0.77	0.67	0.59

Required:

You are required to re-evaluate the proposal using discounted cash flow, and explain where and why your treatment of particular items differs from the above appraisal.

Outsourcing Production of Bolts

Eastside Turbines is considering outsourcing production of the B657 bolts used in the assembly of its standard turbines. The B657 bolts must be manufactured to high levels of precision in order for the turbine assembly to operate efficiently.

The company currently uses these bolts in high volumes (approximately 4,000 per year) and employs two dedicated machinists on flexible contracts solely to manufacture these parts.

The costs of manufacturing each batch of 100 bolts in house is shown below.

B657 Bolts - Batch of 100
Materials	£250
Labour	£85
Variable overhead	£45
Fixed overhead	£50

Boston Bolts, a small local start up business, has offered to supply all the bolts required at a price of £1,880plus a £40 delivery charge per 500 bolts.

Required:

Critically appraise the proposal to outsource production of the B657 bolts from a financial and non-financial perspective and recommend as to the appropriate course of action for management.

Question 3

Fintech plc has share capital comprising 10 million 20p shares; the amount has not changed during the last 5 years. Additional information is available, as follows:

Year	1	2	3	4
Retained profit at the end of year	£200,000
10% Debentures	£1,000,000	£1,200,000
8% Debentures			£1,400,000	£1,800,000
Operating Profit	£300,000	£180,000	£360,000	£396,000

Amounts shown for debentures at the year-end should be assumed to apply for the whole of the year that ends on that date.

Assume that Corporation Tax on profits is 30%

The company pays out 50% of after tax profits as dividends.

Required:

a) Calculate for each year (1) Net profit after tax, (2) Capital gearing ratio, (3) Interest Cover, (4) Retained Earning and (5) Earnings per share

b) Assess the importance of capital gearing making specific reference to the results of your calculations in part a.