Task 1

PROFITABILITY RATIOS

Gross Profit Margin Ratio

Gross profit/Net sales *100

2019 = 332,493 / 538,855 * 100

= 61.7%

2020 = 467031/801524 * 100

= 58.27%

Operating Profit Margin Ratio

= operating Profit/Net sales *100

2019 = 99,565/538,855 * 100

= 15.2%

2020 = 148891/801524 * 100

=7.01%

Net Profit Margin Ratio

= Net income/net sales * 100

2019 = 57663/538855

=10.7%

2020 = 8879/801524

=1.11%

Return on Assets (ROA)

= Net income/Net assest

2019 – 57,633/442,062

=0.13

2020 – 8,879/779,202

=0.01

Return on Capital Employed (ROCE)

ROCE = Earnings Before Interest and Tax/ (Total assets -Current liability)

2019- 84,293/(594,553 – 81,131)

=0.164

2020 – 45,864/ (1,573,432 – 236,751)

=0.034

Return on Equity (ROE)

ROE = Net income/ Shareholders equity

2019- 84,293/442,062

=0.191

2020 – 45,864/779,202

= 0.059

2. Liquidity Ratios

Current Ratio

= Current assets /Current liabilities

2019= 148,173/81,131

=1.826

2020 = 538,189/236,751

=2.273

Quick Ratio

= (Current assets- inventory) /Current liabilities

2019= (148,173-122,773-)/81,131

=0.313

2020 = (538,189-228,793)/236,751

=1.307

Cash Ratio

(Current assets- inventory-Receivables) /Current liabilities

2019= (148,173-122,773-14,206)/81,131

=0.138

2020 = (538,189-228,793-73,668)/236,751

=0.996

Efficiency Ratios

1. Accounts Receivable Turnover

Net Credit sales/Average accounts receivables

Net credit sales= sales -cash sales – sales returns.

2019= (538,855- 6,230)/14,206

= 37.49

2020= (801,524-231,885)/73,668

= 7.73

2. Accounts Payable Turnover

Purchases/ Total accounts payables.

2019=332,493/74,560

=4.46

2020=467,031/143,698

=3.25

3. Asset Turnover Ratio

Sales/Average total sales

2019=538,855/594,553

=0.91

2020=801,524/ 1,573,432

=0.51

4. Capital Turnover Ratio

Sales/average capital employed

2019=538,855/ (594,553-81,131)

=1.05

2020=801,524/ (1,573,432-236,751)

=0.6

5. Inventory Turnover Ratio

Cost of goods sold/average inventory

2019=332,493/122,773

=2.71

2020 = 467,031/ 228,793

=2.04

6. Working Capital Turnover Ratio

Sales/ Working capital

2019=538,855/ (148,173-81,131)

=8.04

2020=801,524 / (538,189 -236,751)

=2.66

Solvency Ratios

1. Debt Ratio

Liability/assets

2019=152,491/594,553

=0.26

2020=794,230 /1,573,432

=0.504

2. Equity Ratio

Shareholder’s equity/total assets

2019=57,633/594,553

=0.097

2020=8,879 / 1,573,432

=0.006

3. Debt to Equity Ratio

Total debt/ Equity

2019=152,491/57,633

=2.65

2020=794,230 /8,879

=89.45

4. Interest Coverage Ratio

EBIT/Interest expense

2019 =84,293/25,500

=3.31

2020 = 45,864/ 241,270

=0.19

3. These three options would require an initial expenditure of (A) £650,000, (B) £1,100,000, or (C) £1,800,000.

	Year 1	Year 2	Year 3	Year 4
	£’000	£’000	£’000	£’000
(A)	300	400	450	500
(B)	500	550	700	950
(C)	500	800	1050	1200

BUSINESS REPORT

The business report will comprise of three projects A, B, and C. The three projects will be evaluated based on their Net Present Value. The projects will later be ranked in order starting from the project with the highest NPV. The projects will be performed based on rank with projects with higher Net present values being performed first.

Project A

Investment =650,000

Cost of capital =6%

n = 4

Year	0	1	2	3	4
Investment	-650,000
Annual cash flows		300,000	400,000	450,000	500000
Capital allowance (20%)		-130,000	-130,000	-130,000	-130,000
Taxable Profit		170,000	270,000	320,000	370,000
Corporation tax (25%)		-42,500	-67,500	-80,000	-92,500
Profit after Tax		127,500	202,500	240,000	277,500
Add back Capital allowance	130,000	130,000	130,000	130,000
Actual annual Cash flows	-650,000	257,500	332,500	370,000	407,500
PVIF (6%) W 1.	1	0.9434	0.89	0.8396	0.7921
Present Value	-650,000	242,926	295,925	310,652	322,781
Net Present Value					522,283
Working 1
(1+ (1+r)^n	1+1.06^n
Year 0	1
Year 1	0.943396
Year 2	0.889996
Year 3	0.839619
Year 4	0.792094
Working 2
NPV=	NPV = CF0/(1+r)^0+ CF1/(1+r)^1+…….+ CFn/(1+r)^n
	Npv = CF0/(1+r)^0+ CF1/(1+r)^1+ CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4

Project B

Year	0	1	2	3	4
Investment	-1,100,000
Annual cash flows		500,000	550,000	700,000	950,000
Capital allowance (20%)		-220,000	-220,000	-220,000	-220,000
Taxable Profit		280,000	330,000	480,000	730,000
Corporation tax (25%)		-70000	-82500	-120000	-182500
Profit after Tax		210,000	247,500	360,000	547,500
Add back Capital allowance	220,000	220,000	220,000	220,000
Actual annual Cash flows	-1,100,000	430,000	467,500	580,000	767,500
PVIF (6%)	1	0.9434	0.89	0.8396	0.7921
Present Value	-1100000	405662	416075	486968	607936.8
Net Present Value					816641.8

Working 1
(1+ (1+r)^n	1+1.06^n
Year 0	1
Year 1	1.106
Year 2	1.223236
Year 3	1.352899016
Year 4	1.496306312
Working 2
NPV = CF0/(1+r)^0+ CF1/(1+r)^1+…….+ CFn/(1+r)^n
Npv = CF0/(1+r)^0+ CF1/(1+r)^1+ CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4
Year 0	-1100000
Year 1	430000*0.9434
Year 2	416075*0.89
Year 3	486968*0.8396
Year 4	607936*0.7921
Total NPV =	816641.75

Year	0	1	2	3	4
Investment	-1800000
Annual cash flows		500,000	800,000	1,050,000	1,200,000
Capital allowance (20%)		-360,000	-360,000	-360,000	-360,000
Taxable Profit		140,000	440,000	690,000	840,000
Corporation tax (25%)		-35000	-110000	-172500	-210000
Profit after Tax		105,000	330,000	517,500	630,000
Add back Capital allowance	360000	360000	360000	360000
Actual annual Cash flows	-1800000	465,000	690,000	877,500	990,000
PVIF (6%)	1	0.9434	0.89	0.8396	0.7921
Present Value	-1800000	438681	614100	736749	784179
Net Present Value					773709

Working 1
(1+ (1+r)^n	1+1.06^n
Year 0	1
Year 1	0.943396226
Year 2	0.88999644
Year 3	0.839619283
Year 4	0.792093663
Working 2
NPV = CF0/(1+r)^0+ CF1/(1+r)^1+…….+ CFn/(1+r)^n
Npv = CF0/(1+r)^0+ CF1/(1+r)^1+ CF2/(1+r)^2+CF3/(1+r)^3+CF4/(1+r)^4
Year 0	-1800000
Year 1	0.9434*465,000
Year 2	0.89*690,000
Year 3	0.8396*877,500
Year 4	0.7921*990,000
Total NPV	773709

Decision: Project B has the highest NPV of 816641.75 and should thereby be preferred and selected. The NPV is higher as compared to project C which has an NPV of 773,709 and project A which has NPV of 522,283.

b)

Year	0	1	2	3	4
Annual cash flows	-1,100,000	430,000	467,500	580,000	767,500
PVIF (35 %)	1	0.7407	0.5487	0.4064	0.3011
Present Value	-1100000	318501	256517.3	235712	231094.3
Net Present Value	-58175.5

IRR= Linear interpolation method

∑1/(1+r)^t*[B-C]=0

=Using 35% rate since it gives a negative NPV.

IRR = r₁+PV₁$frac{r2 – r1}{PV1 + PV2}$

Where r₁=6%

r₂=35%/

PV1= 816,641.75

PV2= -58,175.5

= 6% + (816,641.75[(35%-6%) / (816,641.75 + 58,175.5)]

= 6% + 27.071%

= 33.071%

Decision: Accept investment project since 33.071% (IRR)>6% (predetermined discount rate)

c) Interpret results

i)

Net Present Value (NPV) is equal to the sum of the present value of all the cash flows associated with a project. It is a time discounted technique that takes into account the time value of money. The NPV of simple projects decrease with an increase in the discount rate. In decision making, a manager should only accept projects that are non negative or those that yield the highest NPV after ranking projects. In the presence of capital rationing, it is necessary to normalize projects so that they are comparable. This is crucial in ensuring that projects that yield the highest NPV are first undertaken.

NPV is the most preferred time discounting technique since;

• It recognizes time value of money.

• Considers all cash flows over the entire life of the project.

• Ease to compare projects.

• The NPV of various projects can be added. This ensures that a negative NPV project will not be accepted just because it is combined with positive NPVproject. since NPV (A + B) =NPV (A) + NPV (B)

ii)

Many researchers prefer non-time discounted techniques for project evaluation. Non-time adjusted investment criteria consider benefits and costs as they are in each period. Non-time adjusted investment criteria include urgency, payback period, and ROI (or accounting rate of return) (ARR). Projects that are deemed to be urgent take precedence over projects that are deemed to be less urgent. A project with a shorter payback period is preferred. The higher the accounting rate of return, the more successful the project. In non-discounted techniques, profits can be calculated in relation to the amount of money spent, and the profitability index can be used to equate return on capital with the project’s Weighted Average Cost Capital. A greater index above 1 usually indicates project approval, so this is a simpler decision-making criterion. Most decision makers prefer the non-discounted technique since it is easier to compute and infer as compared to the discounted techniques. It is also a better measure of project risk in current periods and in smaller sized projects.

iii)

There are numerous factors that a manager should consider before undertaking a project. The three major factors affecting a project are; time, cost and quality. These factors could be subdivided into quantitative and qualitative aspects. The quantitative aspects refer to material aspects such as investment capital and levels of return. These quantitative aspects are further determined by calculating expected rates of return and incorporating the project risk. A decision maker makes his decision based on the expected levels of return and the risk associated with the project. The decision makers appetite to risk is a crucial determiner to the choice of investment to undertake. There are also qualitative aspects of a project that require to be considered. They include; vision, superstition, politics, intuition, sponsorship, intangible benefits. These factors are fundamental in ensuring the project meets various specifications. The cost of a project is measured using a capital budget. A decision maker should pay close attention to ensure the project meets the three criteria and that it is feasible.

d)

Project Ranking	Totalcapital available	1	2	3
Project Name (priority)		B	C	A
NPV		816,641.75	773,709	522,283.25
Investment allocation	2,500,000	1,100,000	1,400,000	0
Total NPV	792599.41	359322.4	433277	0

Since there is a capital constraint, projects are ranked based on their NPV. Project B is prioritized since it yields the highest NPV. After having been undertaken, only project C and A remain. Based on NPV, project C is preferred to project A and part of it is undertaken based on the capital available. Project A is not undertaken since there is capital shortage.

e) Recommendations

I would highly recommend that you consider undertaking the projects in order of Project B, Project C and finally Project A. Based on empirical findings, I determined that project b will have the highest Net Present Value as compared to the rest of the projects. The other projects will be considered in the future in the order B, C, and A. Capital is a crucial determiner for undertaking the above projects. I thereby proposed three financing sources along with their merits and demerits which could be a crucial source of finance for the project. These sources are; debt capital, retained earnings and equity capital.

1. Debt capital.

The company could choose to either secure a bank loan or issue debt to the public. In public debt issue, they could use public securities such ass promissory notes or through corporate bonds. By issuing securities in exchange for cash, Greenfield company will be in a position to invest money in the projects and payback the debtors the principal amount plus the accrued interest levels.

Merits

Tax advantages. The amount paid in interest is tax deductible and effectively reduces your net liability.

Control is retained. When you accept debt funding from a lending institution, the borrower has no say in how you run your business. You’re taking all of the options. The partnership will end once you have paid off the loan in full.

Facilitates planning.  You know exactly how much capital and interest you will pay each month. As a result, the budget and financial arrangements are easier to create.

Demerits

Requirements for qualification. To get loans, you’ll need a decent credit score.

Collateral.  By committing to offer leverage to the lender, you could be putting some of your company’s assets at risk. It’s also possible that you’ll be asked to directly guarantee the loan, putting your own assets at risk.

Equity Capital

The company could choose to raise capital by offering the capitals stake in the business in exchange for cash. The investors will thereby become shareholders in the business and will be entitled to receiving dividends. Since this mode of public equity issuing dilutes the company’s ownership, the company could choose to use private equity financing. In this private financing, only members are expected to purchase shares and thereby providing capital to undertake the projects without substantially affecting the ownership.

Merits

Less burden to the company. Therefore, more money could be reinvested to grow the company and undertake the successive projects (C and A)

Build partnerships. The business could benefit from gaining more experienced partners that will steer forward the company to prosperity.

Demerits

Loss of control. Once there is a significant or major shareholder, there will be a loss of partial control.

Share profits. Once there is an additional shareholder, the company’s owners will have to share the available profits before the projects begin to bear fruits.

Retained earnings

Greenfield company could choose to increase its profits to ensure that it retains as much profits as possible. Rather than sharing the increased profits as dividends to shareholders, the company could choose to reinvest the money to perform the projects.

Merits

• There is increased access to urgency funds to conduct the prioritized projects incase of a shortage.

• Eliminates the loss incurred by underpricing emanating from issuing of equity.

Demerits

• Over capitalization

• Reduced dividends to the shareholders.

Based on the findings, I would recommend that Greenfield company makes use of equity since it is a better method of financing deficit. The advantages emanating from equity financing are immense and could immensely help to steer the company forward to future profitability and increased market dominance.

Appendix

Consolidated Statement of Comprehensive Income

For the Year Ended 31 July 2020

	Section	2020	2019
		NZ$’000	NZ$’000
Sales	2.2	801,524	538,855
Cost of sales		(334,493)	(206,362)
Gross profit		467,031	332,493)
Other income	2.2	27,369	1,130)
Selling expenses	2.2	(169,272)	(160,581)
Administration and general expenses	2.2	(176,237)	(73,477)
		(318,140)	(232,928)
Earnings before interest, tax, depreciation and amortisation		148,891	99,565)
Depreciation and amortisation	3.2-3.4	(103,027)	(15,272)
Earnings before interest and tax		45,864	84,293
Finance income		449	37)
Finance expenses		(23,803)	(2,952)
Finance costs – net	4.1.1	(23,354)	(2,915)
Profit before income tax		22,510	81,378)
Income tax expense	2.3	(13,631)	(23,745)
Profit after income tax		8,879	57,633)
Profit for the period attributable to:
Shareholders of the company		8,145	57,633)
Non-controlling interest		734	-)

Other comprehensive income/(expense) that may be recycled through profit or loss:

Movement in cash flow hedge reserve	4.3.2	(9,259)	620)
Movement in foreign currency translation reserve	4.3.2	259	(3,297)
Movement in other reserves	4.3.2	(61)	-)
Other comprehensive expense for the year, net of tax		(9,061)	(2,677)
Total comprehensive income/(expense) for the year		(182)	54,956)
Total comprehensive income/(expense) for the period attributable to:
Shareholders of the company		(920)	54,956)
Non-controlling interest		738	-)
Basic earnings per share	2.4	1.7cps	16.0cps)
Diluted earnings per share	2.4	1.6cps	15.9cps)
Weighted average basic ordinary shares outstanding (‘000)	2.4	493,347	359,600)
Weighted average diluted ordinary shares outstanding (‘000)	2.4	494,582	361,566

Consolidated Balance Sheet

As at 31 July 2020

	Section	2020	2019
		NZ$’000	NZ$’000
ASSETS
Current assets
Cash and cash equivalents	3.1.2	231,885	6,230
Trade and other receivables	3.1.3	73,668	14,206
Inventories	3.1.1	228,793	122,773
Derivative financial instruments	4.2	53	4,964
Current tax asset		3,790	–
Total current assets		538,189	148,173
Non-current assets
Trade and other receivables	3.1.3	3,945	–
Property, plant and equipment	3.2	90,722	60,319
Intangible assets	3.3	682,578	386,061
Right-of-use assets	3.4.1	257,998	–
Total non-current assets		1,035,243	446,380
Total assets		1,573,432	594,553
LIABILITIES
Current liabilities
Trade and other payables	3.1.5	143,698	74,560
Interest bearing liabilities	4.1	–	–
Derivative financial instruments	4.2	7,414	113
Current tax liabilities		8,060	6,458
Current lease liabilities	3.4.2	77,579	–
Total current liabilities		236,751	81,131
Non-current liabilities
Derivative financial instruments	4.2	–	9
Non-current trade and other payables	3.1.5	14,413	–
Interest bearing liabilities	4.1	241,270	25,500
Deferred tax	2.3	81,452	45,851
Non-current lease liabilities	3.4.2	220,344	–
Total non-current liabilities		557,479	71,360
Total liabilities		794,230	152,491
Net assets		779,202	442,062
EQUITY
Contributed equity – ordinary shares	4.3.1	626,380	251,113
Reserves	4.3.2	(16,611)	(6,171)
Retained earnings		165,426	197,120
Non-controlling interest		4,007	–
Total equity		779,202	442,062

Consolidated Statement

of Changes in Equity

For the Year Ended 31 July 2020

		Cash	Foreign	Share
		Flow	Currency	Based			Non-
	Share	Hedge	Translation	Payments	Other	Retained	controlling	Total
	Capital	Reserve	Reserve	Reserve	Reserves	Earnings	Interest	Equity
	NZ$’000 NZ$’000	NZ$’000	NZ$’000 NZ$’000 NZ$’000	NZ$’000	NZ$’000
Balance as at 31 July 2018	249,882	3,498	(8,975)	2,760	–	173,356	–	420,521
Profit after tax	–	–	–	–	–	57,633	–	57,633
Other comprehensive income	–	620	(3,297)	–	–	–	–	(2,677)
Dividends paid	–	–	–	–	–	(33,883)	–	(33,883)
Issue of share capital	1,231	–	–	(1,231)	–	–	–	–
Share based payment expense	–	–	–	721	–	–	–	721
Lapsed share options	–	–	–	(14)	–	14	–	–
Deferred tax on share-based	–	–	–	(253)	–	–	–	(253)
payment transactions
Balance as at 31 July 2019	251,113	4,118	(12,272)	1,983	–	197,120	–	442,062
Profit after tax	–	–	–	–	–	8,145	734	8,879
Other comprehensive income	–	(9,259)	255	–	(61)	–	4	(9,061)
Dividends paid	–	–	–	–	–	(27,209)	–	(27,209)
Issue of share capital	375,267	–	–	(1,666)	–	–	–	373,601
Share based payment expense	–	–	–	378	–	–	–	378
Deferred tax on share-based	–	–	–	(87)	–	–	–	(87)
payment transactions
Non-controlling interest on	–	–	–	–	–	–	3,335	3,335
acquisition
Disposal of non-controlling	–	–	–	–	–	–	(66)	(66)
interest
Transition to NZ IFRS 16	–	–	–	–	–	(12,630)	–	(12,630)
Balance as at 31 July 2020	626,380	(5,141)	(12,017)	608	(61)	165,426	4,007	779,202