BIRMINGHAM CITY BUSINESS SCHOOL

MODULE TITLE:

Managerial Finance (1)

1. Evaluate the financial performance of an organisation using financial and

narrative information.
2. Apply appropriate costing and budgeting techniques to assist in making
management decisions.
3. Evaluate investment projects using various appropriate techniques.
4.
The word limit to any potential narrative question in the third section alone will be a
maximum of 1,500 words excluding the cited references.
Fail
(0%-49%)
Question 1
A lack of breadth and depth of
financial analysis techniques
accompanied by incorrect formulae
or calculation without appropriate
explanation.
Poor layout or presentation in
anything other than business report
style. Inadequate grammar and
lacking in overall knowledgeable
synthesis.
Question 2
A lack of understanding of preparing
cash budget and capital budgeting
techniques is evident. Unable to
correctly prepare cash budget and
apply techniques of capital
budgeting. Has limited or no
narrative discussions.

Question 4
Failure to engage with the topic and
lacking credible academic argument.
No evidence of research other than
internet sites of dubious quality.
Poorly structured and partial
coverage of the contents with weak
grammar.

Pass
(50%-59%)

Commendation
(60%-69%)

Evidence of some financial analysis

techniques but with errors of
formulae and calculation with
insufficient explanation and
adequate presentation.
Attempt at a business report format
with some supportive appendices.
Mainly descriptive with some
attempt at synthesis. Grammar and
structure being adequate.

Wide range of financial analysis

techniques evident and supported by
full disclosure of formulae and accurate
calculation in a clear format.
Presented in business report format
and coherently structured. Supported
by referenced appendices. Effective
and well-reasoned narrative discussion.

A
a
s
fo
a
E
a
fu
E
e
a

Some understanding of preparing

cash budget and capital budgeting
techniques is evident. Partially
correct cash budget and application
of techniques of capital budgeting.
Narrative analysis partially covers
the requirements.
.

A good understanding of preparing cash

budget and capital budgeting
techniques is evident. Correct cash
budget and A good application of
techniques of capital budgeting in the
given scenarios. Narrative analyses are
adequate and explain the use of
financial information for decision
making.
.

E
p
b
C
te
th
a
in
a
w
u
d

Partial engagement with the topic

with some limited evidence of
research. Some analysis of the two
approaches provided. Grammar,
structure and layout adequate.

Identification and conclusion of

arguments surrounding the topic with
reference to credible academic citations
that are fully referenced in a
bibliography. Well-structured and
coherent narrative employing above
average grammar and evidencing

T
w
a
a
g
re
a

significant student research.

Question 1
Alliance Pharma is a British Pharmaceutical firm. The companys financial statements
for the period 2011-2015 are presented below.
Required:
Prepare a business report for Alliances board of directors analysing the companys
financial performance between the periods 2011-2015. Your report should utilise key
ratios, horizontal and vertical analysis and make reference to relevant developments
within Alliance Plc.
Total Marks (50)

Revenue
Cost of sales
Gross profit
Operating Expenses:
Admin & Marketing Exps
Amortisation of Intangible assets
Share-based employee
remuneration
Share of joint venture profits
Total operating expenses
Operating profit/loss excluding
Exceptional items)
Exception Items
Operating profit/loss
Finance cost
Profit before taxes
Taxation
Profit for the year

Alliance Pharma
Income Statement
2015
2014
000s
000s
48,344
43,536
-19,614 -18,493
28,730
25,043

2013
000s
45,275
-17,944
27,331

2012
000s
44,897
-19,779
25,118

2011
000s
45,957
-21,469
24,488

-17,480
-199

-12,510
-488

-12,917
-422

-11,856
-573

-11,235
-735

-615
194
-18,100

-571
319
-13,250

-632
-48
-14,019

-369
0
-12,798

-179
0
-12,149

10,630
6,332
16,962
-1,780
15,182
-2,490
12,692

11,793
-622
11,171
-1,014
10,157
-1,772
8,385

13,312
0
13,312
-1,303
12,009
-2,425
9,584

12,320
0
12,320
-1,511
10,809
-2,119
8,690

12,339
0
12,339
-1,627
10,712
-2,076
8,636

Alliance Pharma Plc

Balance Sheet
2015
2014
000s
000s
Non-current assets
Intangible assets
Property, plant and equipment
Joint Venture investment
Joint Venture receivable
Deferred tax asset
Other non-current assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Equity
Ordinary share capital
Share premium account
Share option reserve
Reverse takeover reserve
Other reserve
Translation reserve
Retained earnings
Total equity
Liabilities:
Non-current liabilities
Long term financial liabilities
Convertible debt
Other liabilities
Derivative financial instruments
Deferred tax liability
Provision for other liabilities
Total non-current liabilities
Current liabilities
Cash and cash equivalents
Financial liabilities
Convertible Debt
Corporation tax
Trade and other payables
Derivative financial instruments
Provisions for other liabilities

259,945
1,013
1,465
1,462
418
122
264,425

88,875
396
1,271
1,462
194
0
92,198

2013
000s

2012
000s

2011
000s

87,111
592
533
1,462
0
443
90,141

79,890 66,130
564
765
0
0
0
0
0
0
0
0
80,454 66,895

12,910
5,914
5,468
5,393 5,652
11,630
8,322
10,641
10,145 8,660
3,229
1,434
687
4,634 1,079
27,769
15,670
16,796
20,172 15,391
292,194 107,868 106,937 100,626 82,286
4,682
108,308
2,610
-329
-98
32
47,237
162,442

2,641
29,388
1,995
-329
-103
0
37,188
70,780

2,641
29,380
1,424
-329
350
0
31,202
64,668

2,430 2,401
25,297 24,866
792
423
-329
-329
0
-4
0
0
23,658 16,771
51,848 44,128

58,968
0
1,496
120
37,413
0
97,997

19,235
0
0
129
6,309
0
25,673

20,881
0
0
0
6,294
199
27,374

20,225 15,225
0 4,460
20
40
0
0
6,124 4,064
364
510
26,733 24,299

31
15,776
0
2,075
13,873
0
0

414
2,895
0
959
6920
0
227

2,125
2,895
0
1,154
8,531
0
190

1
6,250
4,189
1,322
10,086
0
197

1
4,250
0
1,046
8,367
6
189

Total current liabilities

Total liabilities
Total equity and liabilities
Alliance Pharma
FTSE100

31,755
11,415
14,895
22,045 13,859
129,752
37,088
42,269
48,778 38,158
292,194 107,868 106,937 100,626 82,286
2015
2014
2013
2012
2011
49.75
33.75
32.5
32.1
29.3
6960.6
6598.4
6430.1
5737.8 6069.9

Question 2
a) Cash Budget
On December 1, 2016, Zipper Co. is attempting to project cash receipts and
disbursements through January 31, 2017. On this latter date, a note will be payable in
the amount of 50,000. This amount was borrowed in September to carry the company
through the seasonal peak in November and December.
Selected general ledger balances on December 1 are as follows:
Cash
Inventory
Accounts payable

44,000
32,600
68,000

Sales terms call for a 3% discount if payment is made within the first 10 days of the
month after sale, with the balance due by the end of the month after sale. Experience
has shown that 50% of the billings will be collected within the discount period, 30% by
the end of the month after purchase, and 14% in the following month. The remaining 6%
will be uncollectible. There are no cash sales.
The average selling price of the companys products is 50 per unit. Actual and
projected sales are as follows:
October actual
140,000
November actual
160,000
December estimated
165,000
January estimated
125,000
February estimated
120,000
Total estimated for year ending June 30, 2017
1,200,000
All purchases are payable within 15 days. Approximately 60% of the purchases in a
month are paid that month, and the rest the following month. The average unit purchase
cost is 40. Target ending inventories are 500 units plus 10% of the next months unit
sales. Total budgeted marketing, distribution, and customer-service costs for the year
are 300,000. Of this amount, 60,000 are considered fixed (and include depreciation of
15,000). The remainder varies with sales. Both fixed and variable marketing,
distribution, and customer-service costs are paid as incurred.
Required:

Prepare a cash budget for December 2016 and January 2017. Supply supporting
schedules (workings) for collections of receivables; payments for merchandise; and
marketing, distribution, and customer-service costs.
(15 Marks)
b) Capital Budgeting
John Cooper Plc. is an international clothing manufacturer. One of its manufacturing
units in Milan, Italy will become idle on December 31, 2016. You have been asked to
look at three options regarding the plant.
Option 1: The plant, which has been fully depreciated for tax purposes, can be sold
immediately for 225,000.
Option 2: The plant can be leased to the Anderson Corporation, one of John Coopers
suppliers, for four years. Under the lease terms, Anderson would pay John Cooper
55,000 rent per year (payable at year-end) and would grant John Cooper a 10,000
annual discount off the normal price of fabric purchased by John Cooper. (Assume that
the discount is received at year-end for each of the four years.) Anderson would bear all
of the plants ownership costs. John Cooper expects to sell this plant for 37,500 at the
end of the four-year lease.
Option 3: The plant could be used for four years to make souvenir jackets for the
Olympics. Fixed overhead costs (a cash outflow) before any equipment upgrades are
estimated to be 5,000 annually for the four-year period. The jackets are expected to
sell for 27.50 each. Variable cost per unit is expected to be 21.50. The following
production and sales of jackets are expected: 2017, 9,000 units; 2018, 13,000 units;
2019, 15,000 units; 2020, 5,000 units. In order to manufacture the jackets, some of the
plant equipment would need to be upgraded at an immediate cost of 40,000. The
equipment would be depreciated using the straight-line depreciation method and zero
terminal disposal value over the four years it would be in use. Because of the equipment
upgrades, John Cooper could sell the plant for 67,500 at the end of four years. No
change in working capital would be required.
John Cooper treats all cash flows as if they occur at the end of the year, and it uses an
after-tax required rate of return of 10%. Crossroad is subject to a 35% tax rate on all
income, including capital gains.
Required:
1. Calculate net present value of each of the options and determine which option
John Cooper should select using the NPV criterion.
(10 Marks)
2. Calculate the IRR for Option 3. Can the IRR of Option 2 be calculated? Explain.
(2 Marks)
3. What nonfinancial factors should Crossroad consider before making its choice?
(3 Marks)
Total Marks (30)
Question 3
Recent accounting scandals including Enron have been argued to be the result of rule
based accounting. Companies, such as Enron, involved in accounting scandals have

been claimed to have skilfully taken the advantage of the fine details of rule based
accounting standards (US GAAPs) to manipulate accounting threshold for legal and
illegal dealings (Ijiri, 2005).
There is now this debate that rules-based approach (such as the US GAAPs) should be
abandoned in favour of a principle-based approach such as (IFRS).
Required:
Critically analyse both rules-based and principles-based approaches of financial
accounting and reporting. Evaluate the merits and demerits of each approach and their
implications for quality of accounting and financial reporting. Total Marks (20)