Financial Situation Report for Wholesale Foods PLC

Background To Case Study:

Wholesale Foods PLC is a manufacturer of healthy meals designed for people who do not have much spare time and wish to prepare food quickly. The meals are sold nationally through a number of retail outlets.

   
The business has grown significantly over recent years, progressing from a family private limited company to become a PLC quoted on the stock market in 2010.  At that time, a new Chief Executive was appointed in the interests of new shareholders. Over the following period, significant shareholders included some key mutual funds from the city.

You were appointed as Financial Director for Wholesale Foods PLC in April 2016, at the start of a new financial year. 

The impact of Covid-19 and the restrictions placed on people going to work has actually had a positive impact on the company in that people have welcomed access to prepared but healthy meals.  The creation of a website through which the public can order these meals and either collect or request delivery has contributed to very strong financial results over the past year.

Next month you have been asked to provide a report to the Board of Directors about the financial situation of the company, focusing on a number of areas highlighted recently by your fellow directors over the past few months.

You should prepare a report to send to the directors for their consideration so that they are ready for a discussion at the Board meeting next month.  

Your report should be prepared in sections, numbered and headed in accordance with the following 4 parts.

As Financial Director for Wholesale Foods PLC, you face constant pressure to provide realistic financial information to your colleagues on the Board.  This involves close analysis of what the company has achieved and also providing forecasts on expected results and cash flow requirements in the short, medium and long-term.  You are regarded as a reliable but challenging individual and have developed a strong reputation, not only for your analytical skills, but also for your typical honesty within the Board.  In view of this, you are often asked to present to the Board on a wide-range of areas for clarification.

One of your co-directors is aware that, as the company grows and more shareholders have some influence on the direction of the business, it might be difficult to satisfy what they expect.  Indeed, she has heard that conflicts can arise and this can create disagreement in the boardroom.  This could ultimately lead to the company losing focus on the core objectives.

Part 1: The Board Meeting:

You have been asked to address these issues in your report.

Prepare a report examining the objectives which an organisation must be aware of and how these objectives can be managed.  Your report should discuss the following aspects:

Required:

(1) Shareholder wealth maximization, a commercial organisation’s primary objective, clashing with its non-financial goals. (8 marks)

(2) The agency problem which can arise in an organization when ownership is separated from control. (12 marks)

In view of the increase in turnover over the past year, Wholesale Foods PLC needs to invest in its manufacturing facilities so that it can increase production.  For some time, the company has been considering buying new blending equipment which would help to combine larger volumes of raw materials to support higher production levels.  There are two options.  As Financial Director, you have been asked to complete an investment appraisal of both options in readiness to present to the Board of Directors for their approval.

The new equipment will provide estimated cash flows as follows:

The company has an estimated cost of capital of 10 per cent and employs the straight-line method of depreciation for all fixed assets when calculating net profit. Project 1 requires additional working capital of £20,000 immediately whereas project 2 requires an injection of working capital of £15,000 at the start of year 2. The company has sufficient funds to meet all capital expenditure requirements, and working capital is fully recovered at the end of project lives.

Required:

Looking at both machines, complete a capital investment appraisal for each. To provide the company with a range of forecasts, you intend to include a number of capital appraisal techniques to enable them to make a sound decision on which project to choose.  As part of your report, therefore:

Calculate for each machine:

(3) Net Present Value                                          (10 marks)
(4) Approximate Internal Rate of Return            (8 marks)
(5) Payback                                                          (4marks)
(6) After completing the calculations, state whether or not the project should be undertaken and, if so, which machine should be bought.  Provide your reasons to justify your recommendation. (8 marks)