MODULE TITLE : BUSINESS MANAGEMENT TECHNIQUES TOPIC TITLE : FINANCIAL PLANNING AND CONTROL TUTOR MARKED ASSIGNMENT 4 NAME....................................................................................................................................... ADDRESS................................................................................................................................ .................................................................................................................................................. .................................................................................................................................................. ...................................................... HOME TELEPHONE ..................................................... EMPLOYER............................................................................................................................. .................................................................................................................................................. .................................................................................................................................................. ...................................................... WORK TELEPHONE...................................................... BMT - 4 - TMA (v1) © Teesside University 2011 THIS BOX MUST BE COMPLETED Student Code No. .................................................................................................... Student's Signature .................................................................................................. Date Submitted ........................................................................................................ Contact e-mail ......................................................................................................... Published by Teesside University Open Learning (Engineering) School of Science & Engineering Teesside University Tees Valley, UK TS1 3BA +44 (0)1642 342740 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the Copyright owner. This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired out or otherwise circulated without the publisher's prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser. IMPORTANT Before you start please read the following instructions carefully. 1. This assignment forms part of the formal assessment for this module. If you fail to reach the required standard for the assignment then you will be allowed to resubmit but a resubmission will only be eligible for a Pass grade, not a Merit or Distinction. You should therefore not submit the assignment until you are reasonably sure that you have completed it successfully. Seek your tutor's advice if unsure. 2. Ensure that you indicate the number of the question you are answering. 3. Make a copy of your answers before submitting the assignment. 4. Complete all details on the front page of this TMA and return it with the completed assignment including supporting calculations where appropriate. The preferred submission is via your TUOL(E) Blackboard account: https://eat.tees.ac.uk 5. Your tutor’s comments on the assignment will be posted on Blackboard. 1 Teesside University Open Learning (Engineering) © Teesside University 2011 1. (i) The board of a company decides that the strategic objectives of the company should be: • to become established as the best in its field • to be the largest in its market. Comment briefly on what the length of time should be to achieve these objectives. (ii) State how the strategic and sometimes medium term objectives of a company may differ in an important aspect from operational planning. Give some examples of strategic planning activities and operational planning. (iii) State briefly how the type of business a company is engaged in might determine the importance of the type of planning that would be required for: (a) an oil exploration company (b) a clothing retailer. 2 Teesside University Open Learning (Engineering) © Teesside University 2011 2. Carling Ltd is a manufacturer of industrial drills. It has £1M earmarked for capital investment in the current year and the Board has identified two projects (each requiring an initial outlay of £1M) from which it will choose. The company's capital structure at present is: The two rival projects have anticipated costs and income flows as follows: £'000 1000 600 200 150 250 350 200 1750 £'000 1000 100 150 750 450 150 200 1800 Cost Total income Income - Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Project 1 Project 2 Ordinary shares Preference shares Debentures 5% 10% £M 3 4 7 Total capital 14 3 Teesside University Open Learning (Engineering) © Teesside University 2011 (a) The Board is considering funding the investment by either a £1M shares issue or a £1M 10% debenture issue. You are asked to explain which method you would choose. (b) You are asked to evaluate the two projects using: (i) the payback method (by plotting the data) (ii) the DCF/NPV technique (assume a 12% cost of capital). (c) A Board member asks whether risk and uncertainty should be taken into account. You are asked to write a brief report outlining the arguments for and against the suggestion. 3. Using the data from TABLES 1, 2 and 3 below, plot the following graphs: (i) On one set of axes plot the 2 curves of: • ‘total sales revenue’ against ‘volume of sales’ • ‘total costs’ against ‘volume of sales’. The ‘volume of sales’ should be on the x-axis (values from 20 to 26). (ii) On a second set of axes plot the 3 graphs: • ‘marginal cost’ against ‘volume of sales’ • ‘marginal revenue’ against ‘volume of sales’ • ‘price’ against ‘volume of sales’. Again the ‘volume of sales’ should be on the x-axis (values from 20 to 26). 4 Teesside University Open Learning (Engineering) © Teesside University 2011 TABLE 1 TABLE 2 TABLE 3 Price £ Profit £ 80 76 72 68 64 60 56 Volume of Sales Total cost £ 20 21 22 23 24 25 26 720 728 740 756 776 800 828 80 108 124 128 120 100 68 Total sales revenue £ 800 836 864 884 896 900 896 Price £ Marginal cost £ 80 76 72 68 64 60 56 Volume of Sales Total costs £ 20 21 22 23 24 25 26 720 728 740 756 776 800 828 8 12 16 20 24 28 Price £ Marginal revenue £ 80 76 72 68 64 60 56 Volume of Sales Total sales revenue £ 20 21 22 23 24 25 26 800 836 864 884 896 900 896 36 28 20 12 4 –4 5 Teesside University Open Learning (Engineering) © Teesside University 2011 (a) From your graphs determine the maximum profit and optimum volume of sales. (b) What do you notice about: • the marginal cost and marginal revenue lines • total cost and total revenue curves at maximum profit. 4. (i) Imagine you are the manager of a pension fund that invests large amounts of money in companies, most of which are listed on the London Stock Exchange. Returns on your investments provide the funds to pay the pension beneficiaries. State the proportions of fixed interest securities (i.e. debentures, preference shares, etc.) and ordinary shares you would choose with a view to minimising the risk to funds and maximising returns. State briefly the reasons for your investment strategy. (ii) State a source from which you would get information on which to base your investment strategy. (iii) State a possible consequence of other fund managers thinking in a similar vein to yourself. (iv) Select 5 listed London Stock Market companies from different sectors (such as Banking, Information Technology, Media, Chemicals, Construction, Retailers, Transport, Mining, Oil & Gas, Pharmaceuticals, Property, etc.) in which you intend to invest substantial amounts of capital with a view to seeking a return on your investment. Briefly give reasons for your selections. 6 Teesside University Open Learning (Engineering) © Teesside University 2011 5. Prepare a cash budget for January 2006 to March 2006 with the following information given. Cash balance at 1 January 2006 = £5500 Selling price = £16.00 1/2 received in the production month being considered. 1/2 received two months later (e.g. in January receive 1/2 of January’s plus 1/2 of November’s) Direct labour = £5.00 paid same month of production Direct materials = £5.00 paid the month before production Variable costs = £4.00 1/2 paid in the month before production 1/2 paid in the month of production (e.g. for January, pay 1/2 in December plus 1/2 in January) Fixed costs = £1500 per month. Use the grid on page 8 to illustrate your answers. Oct. Sales Production 1400 1250 Nov. 1000 1200 Dec. 800 1000 Jan. 1000 800 Feb. 1000 1500 Mar. 1200 1750 Apr. 1000 1400 7 Teesside University Open Learning (Engineering) © Teesside University 2011 January Opening balances Receipts (1) Receipts (2) TOTAL INCOME Direct labour Direct materials Variable costs (1) Variable costs (2) Fixed costs TOTAL COSTS NET TOTAL FOR MONTH February March 8 Teesside University Open Learning (Engineering) © Teesside University 2011