Posted: September 13th, 2017

Finance and Accounting

Finance and Accounting
Part A
The case study states “the construction of the hotel will be financed mainly through pre-sales of serviced apartments”. In your report to potential investors, bankers and other interested parties, you need to include the following:

a) Identify 4 main sources of finance, in addition to the ‘pre-sales of serviced apartments’ available to Emaar Properties Plc for this Hotel project. State any 3 factors which will enhance decision making on the type of sources of finance for any business organisation.
b) Assess the implications of legal status; dilution of control; and tax effects have on the choice for any particular sources of finance for a business organisation.
c) Evaluate the appropriateness of the ‘pre-sales apartments’ suggested by the CEO of Emaar Properties Plc compared to the other four you have mentioned in A.a) .

Part B
As well as you having to discuss sources of finance for the project, The Management has asked you to compare the two options of raising funds in terms of how costly they will be, as given below. These will form the second part of your report:
a) Analyse the cost of using i) Debt or ii) Equity to finance the Hotel project and advise Emaar Properties Group the advantages of using either debt or equity to finance the Hotel project
b) Explain the importance of Financial Planning to the CEO, Mr Arif Amiri and advise him on how a cash budget can be used as a preventive measures against ‘overtrading’ in businesses.
c) Assess the characteristics of information needs for the CEO of Emaar Properties Group, the Project Manager and the Construction Supervisor for decision making on the planned apartments.
d) Explain the impact of finance such as long-term loan, equity shares, finance and operating leases on a business’s financial statements.
Quarter 1 Quarter 2 Quarter 3
Opening cash balance 5 000

Expected cash receipts:
Cash revenue 90 000 80 000 60 000
receivables 54 000 57 000 20 000
Loan 10 000 5 000 –
Total cash available 154 000 142 000 80 000

Disbursements
Material 20 000 30 000 55 000
labour 30 000 35 000 40 000
Administrative 2 000 2 000 3 000
Machinery purchase 45 000 – 90 000
Income tax 11 000 11 000 12 000
Total disbursements 108 000 78 000 200 000

a). Analyse the opening and closing cash balances for each quarter and make appropriate recommendations with regard to the cash budget which you need to prepare using the above information

Task 3
Information on producing a unit of product called the ‘Magic’ by Q Ltd is as follows:
Selling price $ 15 per unit
Variable Production cost $1.20 per unit
Variable Selling Cost $0.40 per unit
Fixed Production Cost $40 000
Fixed Selling Cost $20 000
Full capacity 10,000 units
Current capacity 8 000 units

Z Plc has approached the business and requested to purchase 1500 units of product ‘Magic.

b). Explain the calculation of unit cost to Q Ltd and make a pricing decisions using relevant information, Advise the management of Q Ltd on the least value of offer that must be accepted.
Task 4
EPG Plc is considering two other investment projects in another city and the estimated cash flows are as follows:
Year
Hotels Housing
$(m) $(m)
0 Capital outlay (100) (150)
Net cash flows
1 60 60
2 30 60
3 40 60
4 80 60
4 Residual value 10 20

The company’s cost of capital is 15%.
a) Assess the viability of these two projects using NPV and Payback period as the appraisal techniques and advise the EPG Ltd Board of directors accordingly. Explain the importance of IRR to the CEO.

a) Discuss the main financial statements that EPG Ltd will need/use and explain their importance
b) Compare appropriate formats of financial statements for different types of business: Sole trader, partnership and limited company

Task 5
EPG Plc would like to acquire (100%) a suitable company as means for expansion. It has obtained the following draft financial statements for two companies, Grappa and Merlot. They operate in the same industry and their managements have indicated that they would be receptive to a takeover.

Income statement for the year ended 30 September 2013
Grappa Merlot
$(000) $(000)
Revenue 12,000 20,500
Cost of Sales (10,500) (18,000)
Gross Profit 1500 2500
Operating expenses (240) (500)
Finance cost
Loan (210) (300)
Overdraft Nil (10)
Lease Nil (290)
Profit before Tax 1050 1400
Taxation (150) (400)
Profit after Tax 900 1000
Dividends (100) (100)
Retained Earnings 800 900

Statement of Financial Position as at 30 September 2013
$(000) $(000) $(000) $(000)

Non-Current Assets:
Property, Plant and Equipment 9400 7500

Current Assets:
Inventory 2000 3600

Trade Receivables 2,400 3700
Bank 600 nil
Total Current Assets 5,000 7,300
Total Assets 14,400 14,800

Equity & Liabilities
Ordinary shares of $1 each 2000 2000
Property Revaluation Reserve 900 Nil
Retained Earnings 2600 800
Total Equity 5500 2800

Non Current Liabilities:
Debentures 4800 6300
Current Liabilities:
Bank overdraft Nil 1200
Trade Payables 3100 3800
Government Grant 400 Nil
Finance Lease obligation Nil 500
Tax 600 200
Total Current Liabilities 4100 5700
Total Equity and Liabilities 14400 14800

The following ratios have been calculated for Grappa and are believed to be accurate:
Return on year end capital employed (ROCE) 14·8%
Net asset (total assets less current liabilities) turnover 1·2 times
Gross profit margin 12·5%
Operating profit margin 10·5%
Current ratio 1·2:1
Closing inventory holding period 70 days
Trade receivables’ collection period 73 days
Trade payables’ payment period (using cost of sales) 108 days
Gearing 35·3%
Interest cover 6 times

Interpret the financial statements for Merlot using the appropriate ratios and compare the performance of both companies, Merlot and Grappa, in order to advise EPG Plc on its acquisition plans.
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