Introduction to Finance Assignment: Corporate Governance, Investment Decision Making, Cost-Volume-Pr

As part of the formal assessment for the programme you are required to submit an Introduction to Finance assignment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

After completing the module, you should be able to:

1. Contrast the appropriateness of the different sources of finance to a business.
2. Explain the implications of finance as a resource within a business.
3. Produce simple financial statements in accordance with accepted principles.
4. Use financial information for decision making purposes.
5. Demonstrate a confident use of the financial terminology and conventions in communicating results.

Question 1

(a) Corporate governance can be thought of as the way in which an organisation is directed and controlled. Explain the nature of the current approach to corporate governance in the UK. Your explanation should include an outline of agency theory.

(b) Critically evaluate the current approach to corporate governance in the UK.

Question 2

Spahi plc is considering an investment in a new manufacturing equipment. Two potential machines (machine A and machine B, respectively) have been identified. However, capital limitations mean that an investment can only be made in one of the two machines.

The rapid pace of technological development in the sector in which Spahi plc operates means that each machine has a relatively short expected useful life. Machine A is capable of being used for four years; machine B is capable of being used for six years. After these periods, each machine will have a value of £nil. The following information is available:

	Machine A	Machine B
	£	£
Initial cost (year 0)	120,000	110,000
Scrap value (year 7)	nil	nil
Forecast net cash inflows
Year 1	24,000	24,000
Year 2	48,000	25,000
Year 3	50,000	25,000
Year 4	25,000	50,000
Year 5		50,000
Year 6		70,000

Spahi plc has a cost of capital of 7%.

Assume that all cash flows occur at the end of the respective year. Ignore the effects of taxation.

(a) Calculate the accounting rate of return (ARR) for machine A and machine B. Assume that the only difference between cash flow and profit is the depreciation charge.

(b) Calculate the net present value (NPV) for machine A and machine B.

(c) Calculate the payback period for machine A and machine B.

(d) Explain in which machine the company should invest. Support your explanation with the results of your calculations in parts (a), (b) and (c).

(e) Explain the qualitative factors that the managers of Spahi plc might also need to consider, in addition to the results of the capital investment appraisal, before making a decision on in which machine the company should invest.

Question 3

Washbug Ltd is specialized in producing and selling domestic ovens. In 2019, 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 2019 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 2020, 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 2019. The company plans to produce and sell the same quantity of domestic ovens in 2020 as in 2019.

(a) Calculate the break-even point and margin of safety in both units and revenue for 2019 and 2020.

(b) Critically evaluate the CVP technique. Your critical evaluation should include an explanation of the limitations of this technique in the context of both the different interpretations offered by the economist’s model of CVP.

Question 4

The Trial Balance for Energise Ltd as at 30 June 2020 is as follows:

	Debit	Credit
	£	£
Revenue Purchases	85,000	162,000
Inventory at 1 July 2018	7,100
Distribution expenses	1,500
Administration expenses	2,800
Wages and salaries	31,000
Property at valuation Property accumulated depreciation as at 1 July 2019	150,000	35,000
Plant & equipment at cost Plant & equipment accumulated depreciation at 1 July 2019 Motor vehicles at cost Motor vehicles accumulated depreciation as at 1 July 2019 Trade receivables	80,000 50,000 13,200	55,000 15,000
Trade payables		11,400
Bank & cash		1,500
Share capital and reserves		135,700
5% Debentures		5,000

The following information is also available:

1. Inventory at 30 June 2020 was valued at £8,500.
2. Wages and salaries amounting to £10,000 are to be accrued for the year ended 30 June 2020.
3. Admin expenses amounting to £2,000 have been prepaid in the year ended 30 June 2020.
4. Loan interest has not been paid for the year ended 30 June 2020. A full year’s debenture interest should be provided for.
5. A bad debt expense of £500 has not been accounted for in the above trial balance.
6. Equipment which cost £10,000 was purchased late in the year and has not been included in the accounts of Energise for the year ended 30 June 2020.
7. An item of plant, which still remains in the books, was sold for £5,000 on 1 October 2019. This amount was credited to administration expenses and debited to the cash account. The original cost of the plant was £12,000 and its net book value at 1 July 2014 was £6,000.
8. Depreciation for the year is to be provided as follows:

Property 5% per annum on valuation; Plant & equipment 15% per annum straight line assuming a residual value of £1,000; Motor vehicles 20% reducing balance

1. The tax charge for the year ended 30 June 2015 amounted to £750.

Prepare the statement of comprehensive income for the year ended 30 June 2020.