|
TASK DESCRIPTION |
Express PLC is a business quoted on the stock exchange manufacturing electronic components for sale to electrical product manufactures. E.g. LG; Panasonic ; Phillips etc. It has provided you with financial information from the previous four years, together with comparisons with a similar sized business and the business sector norm. It has also included details of its investment plans for the future.
You are required to provide a report which incorporates the following :
- Use the information provided below to produce a report for the Board of Directors of Express PLC, analysing and commenting upon its financial performance, covering the following five key areas:
- i) Profitability
- ii) Liquidity
- iii) Efficiency
- iv) Investment
- v) Gearing
You should state any assumptions you make as part of your analysis and provide conclusions and recommendations, incorporating suggestions of areas requiring further investigation.
(Note: Case Study information is provided on pages 4,5 and 6 for the completion of the above task.)
The company is considering an expansion programme and investing in two new capital projects
at different manufacturing locations. The following information is to be used to for the report :
2) Evaluate the above two projects – D and E, using three key capital project appraisal models /
techniques. (You are required to show all calculations )
Evaluate critically each of the three capital evaluation models utilised above, and explain which project you would recommend, incorporating the reasons for your decision.
Identify what other factors should be considered before an investment decision is made
- Projects D and E are divisible ( ie. It is possible to undertake a fraction of a total project. )
Calculate : (1) The optimal investment policy.
(2) The resulting total NPV from your investment policy.
If projects D and E were indivisible projects, explain how this would affect your decision above.
- Discuss critically some of the main difficulties (practical and theoretical) encountered in appraising capital investment projects, and comment on ways of overcoming those difficulties
|
2011 |
2012 |
2013 |
2014 |
|
|
Current Ratio |
3.5 |
3.4 |
3.2 |
3.1 |
|
Gross Profit% |
30% |
29% |
33% |
35% |
|
Stock Turnover in Days |
65 |
67 |
69 |
67 |
|
Net Profit % |
2.0% |
2.1% |
1.62% |
1.52% |
|
Fixed Asset Productivity |
2.85 |
2.90 |
1.52 |
1.12 |
|
Working Capital Turnover |
2.70 |
2.50 |
2.50 |
2.25 |
|
Quick Ratio |
2.40 |
2.20 |
1.85 |
1.70 |
|
Return on Capital Employed |
3.3% |
3.1% |
2.3% |
2.4% |
|
Gearing # |
35% |
55% |
64% |
71% |
|
Debtors Collection Period |
76 |
88 |
93 |
111 |
|
Creditors Payment Period |
45 |
47 |
52 |
50 |
|
Return on Equity (i.e. Shareholder’s Funds) |
3.1% |
4.3% |
4.5% |
4.3% |
|
Interest Cover |
3.0 |
2.7 |
1.9 |
2.1 |
|
Dividend Cover |
2.0 |
2.9 |
3.7 |
3.1 |
|
Dividend Yield |
5.3% |
3.2% |
1.9% |
2.1% |
|
Average Share Price |
€12.70 |
€13.90 |
€13.54 |
€14.12 |
|
Earnings Per Share ( €1) |
€0.8 |
€0.94 |
€0.98 |
€0.81 |
|
P/E Ratio |
15.88 |
14.78 |
11.02 |
10.77 |
|
% Overheads / Cost of Sales |
45% |
40% |
55% |
58% |
|
%Materials/ Cost of Sales |
40% |
43% |
51% |
48% |
|
% Wages/ Cost of Sales |
15%
|
17%
|
22% |
24% |
|
Cash Operating Cycle |
96 days |
108 days |
131 days
|
152 days
|
- #Gearing is based on: Long Term Debt x 100%
*Total Capital Employed
*(no new ordinary share capital has been issued between 2010 and 2014).
- The current bank investment rate is 8%
3. Other financial information:
|
2011 |
2012 |
2013 |
2014 |
|
|
€ |
€ |
€ |
€ |
|
|
Sales |
16.1m |
17.8 m |
19.5 m |
20.2m |
|
Profit after tax and interest |
326,000 |
355,000 |
308,000 |
307,000 |
|
Fixed Assets |
9.2m |
11.5 m |
15.5m |
18.2m |
Additional Information
Comparative ratios for the period 2014 are provided with similar a sized competitor and the business
sector norm:-
|
Similar Sized Competitor |
Business Sector Norm |
|
|
Current Ratio |
2.5 |
2.1 |
|
Gross Profit% |
31% |
32% |
|
Stock Turnover in Days |
52 |
52 |
|
Net Profit % |
5.3% |
4.1% |
|
Fixed Asset Productivity |
3 Times |
2.1 Times |
|
Working Capital Turnover |
3.2 Times |
3.6 Times |
|
Quick Ratio |
1.8 |
1.7 |
|
Return on Capital Employed |
6.7% |
6.5% |
|
Gearing # |
52% |
49% |
|
Debtors Collection Period |
51 |
68 |
|
Creditors Payment Period |
45 |
52 |
|
Return on Equity (i.e. Shareholders Funds) |
7.8% |
9% |
|
Interest Cover |
4.2 Times |
5.1 Times |
|
Dividend Cover |
2.8 Times |
3.1 Times |
|
Dividend Yield |
4.15% |
2.60% |
|
Average Share Price |
€7.25 |
€32.5 |
|
Earning Per Share ( €1) |
€1.75 |
€1.2 |
|
P/E Ratio
|
12
|
19
|
|
Cash Operating Cycle |
52 days |
68 days |
Express Plc is considering investing in two new capital projects.
Each project entails the purchase of a range of new equipment, which would improve output volume and quality of products. Both of these projects are divisible ( ie. It is possible to undertake a fraction of a total project).
It has applied to its bank for a loan of €175 million, at 12% interest, which it anticipates obtaining following negotiations, which would include a review of its financial performance, based on the report produced above – task 1.
Both of these projects are divisible i.e. it is possible to undertake a fraction of a total project. The business has calculated its weight average cost of capital as 10%, after the introduction of the new loan. The estimated cash flows for each of the two projects are as follows:
|
Project D €
|
Project E € |
|
|
Initial capital expenditure |
145 |
115 |
|
Net cash flows Year 1 |
78 |
38 |
|
Year 2 |
72 |
36 |
|
Year 3 |
42 |
45 |
|
Year 4 |
8 |
32 |
|
Estimated resale value end of year 4 |
10 |
10 |
Notes:
The present value of €1 received at the end of Year is as follows:
|
Rate
|
10% |
15% |
20% |
25% |
|
Yr 1 |
0.909 |
0.870 |
0.833 |
0.800 |
|
2 |
0.826 |
0.756 |
0.694 |
0.640 |
|
3 |
0.753 |
0.658 |
0.579 |
0.512 |
|
4 |
0.683 |
0.572 |
0.482 |
0.409 |
|
5 |
0.621 |
0.497 |
0.402 |
0.328 |
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