UNIVERSITY OF SUNDERLAND

Faculty of Business and Law

APC308 Financial Management - Individual assignment

Weighting – 100% of the marks for this module

This is an individual assignment of 3,000 words. (+ or – 10%)

SunSpace & JIRA/Webservices Deadline: Tuesday 20th June 2017 at 16:00

Students are required to submit their assignments through Turnitin on

SunSpace then to JIRA. Only assessments submitted through JIRA and
SunSpace will be marked.

Requirements:

You must answer any TWO questions. Each question that is attempted will
carry a maximum mark of 50%

Question 1 – Dividend Policy

Deciding how much earnings to retain and how much to return to ordinary shareholders is a
key part of dividend policy. Drawing on the dividend policy literature critically discuss some
of the factors that need to be considered by senior managers of a listed company when
deciding on:

a) the size of the annual dividend to return to its shareholders (12 marks)

b) and the practical issues that need to be considered when deciding on (12 marks)
the size of the dividend payment.

Squeezeco is currently deciding on the level and form of its next dividend. It is considering
three options:

i. A cash dividend payment of 15p per share

ii. A 5% scrip dividend
iii. A repurchase of 15 % of ordinary share capital at the current market price

Extracts form the company’s financial statements are given below

£m £m
Operating profit 24.5
Taxation 7.8
Distributable earnings 16.7
Non-current assets 75
Current Assets
Trade receivables 27
Inventory 24
 Cash 46 97
Total Assets 172
Equity Finance
Ordinary Shares (50p) 26
Reserves 108 134
Current Liabilities 38
Total liabilities 172
c) If the current cum dividend share price is 432p, calculate the (16 marks)
effect of the three options on the wealth of a shareholder owning
1250 shares in Squeezeco.

d) Critically discuss how the company’s decision will be influenced by the (10 marks)
opportunity to invest £70m in a project with a positive net present value.

Total (50 marks)

Question 2 – Mergers and Takeovers

The managing directors of Aztec are considering what value to place on Trojan plc, a
company that they are planning to take near in the near future. Aztec’s plc’s share price is
currently £3.89 and the company’s earning per share stand at 21p. Aztec’s weighted average
cost of capital is 9%.

The board estimates that annual after tax synergy benefits resulting form the takeover will be
£4.35m, that Trojans’ distributable earnings will grow at an annual rate of 2% and that
duplication will allow the sale of the £21m of assets, net of corporate tax (currently standing
at 20%), in a years time. Information relating to Trojan plc.:

Financial Statement of Trojan plc

£m
Non-current assets 270
Current assets 56
Total assets 326
Equity
Ordinary Shares (£1) 147
Reserves 64
211
7% bonds 72
Current liabilities 43
Total liabilities 326

Statement of profit or loss extracts

£m
Profit before interest and tax 64.0
Interest payments 6.5
Profit before tax 57.5
Taxation 17.1
 Distributable earnings 40.4

Other information:
Current ex-div share price £2.05
Latest dividend payment 13p
Past four years dividends payment 10p, 10.5p, 11p, 12p
Trojan’s equity beta 1.1 %
Treasury bill yield 5%
Return on the market 11%

Given the above information calculate the value of Trojan plc using the following valuation
methods:

a) Price/earnings ratio (10 marks)

b) Dividend valuation method (10 marks)

c) Discounted cash flow method (10 marks)

d) Drawing on the mergers and takeovers literature, critically discuss (20 marks)
the problems associated with using the above valuation techniques
and based on this which of the above you would recommend the board
of Aztec to use.

Question 3
Lovewell Limited a food manufacturer is considering purchasing a new machine for
£275,000. The company is expecting an annual cash inflow of £85,000 from the sale of
products and an annual cash outflow of £12,500 for each of the six years of the machine’s
useful life. The annual cash outflows do not include annual depreciation charges for the
machine. The machine is depreciated using the straight –line method. The machine is
expected to last for six years, with a residual value estimated to be at the rate of 15% of the
original cost of the machine. The cost of capital for Lovewell Limited is 12%.

You are required to:

1. Calculate using the following investment appraisal techniques, and provide brief
recommendations as to the economic feasibility of acquiring the machine:
a. The Payback Period.
b. The Accounting Rate of Return.
c. The Net Present Value.
d. The Internal Rate of Return (to two decimal places)
(20 marks)

2. Critically evaluate the benefits and limitations of each of the differing investment
appraisal techniques.
 (30 marks)

Table 1 Applied Penalties for Exceeding the word count.

Word limit Penalty Actual

Word Count
Exceeds limit by up to 10% No penalty – tolerance 3300
band (see below)
Exceeds limit by 10.1-20% -5% 3301 – 3600
Exceeds limit by 20.1-30% -10 % 3601 - 3900
Exceeds limit by 30.1-40% -15 % 3901 - 4200
Exceeds limit by 40.1-50% -20 % 4201 - 4500
Exceeds limit by more than 50% Mark of zero 4501+

The learning outcomes for this module assessed by this piece of work are:

Knowledge

1. Examined and critically evaluated the key strategic decisions that a

business may have to make and appreciated how accounting and
finance can assist in making and evaluating those decisions.
2. A critical understanding of specific analytical skills in key decision
areas within strategy and finance at local and international level
3. A critical understanding of the limitations of the current state of
financial theory in making strategic business decisions

Skills
4. Applied the key valuation concepts and methodologies of financial
decision making in order to contribute to the wider decision making
of the organisation

Assessment Criteria
Your seminar tutor on the basis of the following generic criteria will assess the paper:
 Categories
Grade Relevance Knowledge Analysis Argument and Structure Critical Evaluation Presentation Reference to Literature
86 – 100% The work examined is exemplary and provides clear evidence of a complete grasp of the knowledge, understanding and skills appropriate to the Level of the qualification. There is also ample excellent evidence
showing that all the learning outcomes and responsibilities appropriate to that Level are fully satisfied. At this level it is expected that the work will be exemplary in all the categories cited above. It will
demonstrate a particularly compelling evaluation, originality, and elegance of argument, interpretation or discourse.
76-85% The work examined is outstanding and demonstrates comprehensive knowledge, understanding and skills appropriate to the Level of the qualification. There is also
excellent evidence showing that all the learning outcomes and responsibilities appropriate to that level are fully satisfied. At this level it is expected that the work will be
outstanding in the majority of the categories cited above or by demonstrating particularly compelling evaluation and elegance of argument, interpretation or discourse.
The work examined is excellent and is evidence of comprehensive knowledge, understanding and skills appropriate to the Level of the qualification. There is also
70 – 75% excellent evidence showing that all the learning outcomes and responsibilities appropriate to that level are satisfied At this level it is expected that the work will be
excellent in the majority of the categories cited above or by demonstrating particularly compelling evaluation and elegance of argument, interpretation or discourse.
Directly relevant to A substantial knowledge A good strategic Generally coherent and logically May contain some Well written, with Critical appraisal of up-todate
60 – 69% the requirements of strategy material, analysis, structured, using an appropriate distinctive or independent standard spelling and and/or appropriate literature.
of the assessment showing a clear grasp of clear and orderly mode of argument and/or thinking; may begin to grammar, in a readable Recognition of different
themes, questions and theoretical mode(s) formulate an independent style with acceptable perspectives.
issues therein position in relation to format Very good use of source material.
Pass

strategic theory Uses a range of sources

and/or practice.
Some attempt to address Adequate knowledge of a Some analytical Some attempt to construct a Sound work which expresses Competently written, with Uses a variety of literature which
50 – 59% the requirements of fair range of relevant treatment, but may be coherent argument, but may suffer a coherent position only in only minor lapses from includes some recent strategic
the assessment: strategy material, with prone to description, or loss of focus and consistency, broad terms and in uncritical standard grammar, with texts and/or appropriate literature,
may drift away intermittent evidence of to narrative, which with issues at stake stated only conformity to one or more acceptable format though not necessarily including a
from this in less an appreciation of its lacks clear analytical vaguely, or theoretical mode(s) standard views of strategy. substantive amount beyond library
focused passages significance purpose couched in simplistic terms texts. Competent use of source
material.
40 – 49% Some correlation with Basic understanding of Largely descriptive or A basic argument is evident, but Some evidence of a view A simple basic style but Some up-to-date and/or
the requirements of the the strategy but narrative, with little mainly supported by assertion starting to be formed but with significant appropriate literature used. Goes
assessment but there are addressing a limited evidence of analysis and there may be a lack of clarity mainly derivative. deficiencies in expression beyond the material tutor has
instances of irrelevance range of material and coherence or format that may pose provided. Limited use of sources
obstacles for the reader to support a point.
35 – 39% Relevance to the A limited understanding Heavy dependence on Little evidence of coherent Almost wholly derivative: Numerous deficiencies in Barely adequate use of literature.
requirements of the of a narrow range of description, and/or on argument: lacks development and the writer’s contribution expression and Over reliance on material
assessment may be very strategic material. paraphrase, is common may be repetitive or thin rarely goes beyond presentation; the writer provided by the tutor.
intermittent, and may be simplifying paraphrase may achieve clarity (if at
reduced to its vaguest all) only by using a
and least challenging simplistic or repetitious
terms style
Fail

The evidence provided shows that the majority of the learning outcomes and responsibilities appropriate to that Level are satisfied – for compensation consideration.
30 – 34% The work examined provides insufficient evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence provided shows that some of the learning outcomes and
responsibilities appropriate to that Level are satisfied. The work will be weak in some of the indicators.
15-29% The work examined is unacceptable and provides little evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence shows that few of the learning outcomes
and responsibilities appropriate to that Level are satisfied. The work will be weak in several of the indicators.
0-14% The work examined is unacceptable and provides almost no evidence of the knowledge, understanding and skills appropriate to the Level of the qualification. The evidence fails to show that any of the learning
outcomes and responsibilities appropriate to that Level are satisfied. The work will be weak in the majority or all of the indicators.

Generic Assessment Criteria – Undergraduate

These should be interpreted according to the level at which you are working and related to the assessment criteria for the module