A This section is based on the case study QUESTION1. Read the case study about Datahelp Ltd, at the end of this question, and produce a report on the risks and rewards of the business. Your report should include a section summarising any recommendations you make. Your answer must not exceed 1,500 words. You are advised to show any substantial calculations (such as the cash budget) in an Appendix. You are advised to include citations for any sources other than lecture materials. Your report should have a suitable title and contain the following sections: 1. 1.1 1.2 1.3 1.4 Discussion Budgetary control report Ratio analysis Cash budget for April May and June Refinancing QUESTION 2. Assume one of Mark's cousins (Shelley) is, after all, able to help fund the business. She offers to buy Datahelp shares for 8,000, enabling the company to immediately repay the 8,000 loan. She will then hold 40% of the shares in the company 1 N1086 Introduction to Accounting Required: Using discounted cash flow techniques, calculate how long will it take Shelley to recover her investment? Assume that: She is assured of a genuine 40% share in dividends and capital growth Her cost of capital is 1% per month After June, cash receipts increase at 5% a month and cash payments increase at 2% a month [10 marks] Imagine it is now 31st March 2022. CASE STUDY When Mark left university, he decided to run a business selling and repairing computers. In order to do this, he set up a limited company, Datahelp Limited. He planned to deposit 100 in the company's bank account on 1 January 2022 and issue 100 shares, with a nominal value of 1 each, in his own name. He also planned for the company to borrow 8,000 from his father Mark planned to rent premises for his business at 2,000 a month and lease test and IT equipment for 600 a month. He would pay 4,000 for signage and furniture. For each of the first two months he would spend 7,500 on computers for resale and components for repairs. In the third month he hoped to buy 7,000 of computers on credit. At the outset, he would hire a technician, at a cost of 2,000 a month, to do the repair work, whilst he mostly dealt with selling and administration. He would pay himself 1,000 a month in salary and planned to take further income as dividends. He estimated that he would use 200 worth of electricity per month and expected to get the first bill at the beginning of April. He would pay 1,200 for 12 months' insurance. Other expenses paid for during the first 3 months would be: Rates Utilities (excluding electricity) Advertising Mileage (not deliveries) per month 333 300 300 250 Each month he hoped to sell computers for 8,667 and charge 2,500 for repairs Each month he hoped to sell computers for 8,667 and charge 2,500 for repairs At the end of 3 months he estimated that he would have inventory, of unsold computers, which would have cost him 10,000 He estimated that wear and tear on the long-term assets of the business would amount to about 800 a year, so they would need replacing after about 5 years (5 x 800 = 4,000) Now that he has been trading for 3 months, Mark has produced a budgetary control report and cash flow statement for the 3 months and a Statement of Financial Position for 31st March and he has calculated some key financial ratios. These are shown below. 3 N1086 Introduction to Accounting He spent an extra 1,000 on advertising, which increased the volume of both sales and repairs by 20%. Mark's father would very much like his 8,000 back, so Mark needs to consider how he might be able to repay the loan. He has no other family or friends able to provide funding. Datahelp Ltd Budgetary Control Report for the 3 months to 31 March 2022 Sales Revenue: Sale of computers Repairs Budget Actual Variance 26,001 31000 4,999 Fav 7,500 9000 1,500 Fav 33,501 40,000 6,499 Fav Opening inventory 0 0 0 Purchases 22,000 27,300 5,300 Adv Technician salary 6,000 7,200 1,200 Adv Closing inventory (10,000) (12,000) 2,000 Fav Cost of Sales 18,000 22,500 4,500 Adv Gross Profit 15,501 17,500 1,999 Fav Operating expenses: Rent 6,000 6,000 0 Leasing of equipment 1,800 1,800 0 Mark's salary 3,000 3,000 0 Electricity 600 620 20 Adv Insurance 300 300 Rates 999 999 Utilities (excluding electricity) 900 880 Advertising 900 1,900 Mileage 750 760 Depreciation 200 200 15,449 16,459 0 20 Fav 1,000 Adv 10 Adv 0 1,010 Adv Operating profit 52 1,041 989 Fav Datahelp Ltd Statement of Financial Position as at 31 March 2022 ASSETS Non-Current Assets Fixtures and fittings 3,800 Current Assets Inventory 7,400 Prepaid expense 900 Cash at Bank 4,661 12,961 16,761 Total Assets EQUITY AND LIABILITIES Equity Share capital 100 Retained profit 1,041 1141 Non-Current Liabilities Loan 8,000 Current Liabilities Trade payables Accrued expense Total equity and liabilities 7,000 620 7,620 16,761 Datahelp Ltd Statement of Cashflows for the 3 months to 31 March 2022 Cash flows from operating activities Profit before interest and income taxes 1,041 Add Depreciation/impairment of assets 200 Decerease in receivables (900) Decrease in inventories Increase in trade payables Net Cash from Operating Activities Cash flows from investing activities Signage & furniture (7,400) 7,620 561 (4,000) Net cash used in investing activities (4,000) Cash flows from financing activities Issue shares 100 Loan 8,000 Net cash used in financing activities 8100 Net increase in cash and cash equivalents 4,661 Cash and cash equivalents at 1/1/22 Cash and cash equivalents at 31/3/22 4,661 Financial Ratios at 31 March 2022 Acid test ROCE Gearing 0.73 11.39% 87.50% Financial Ratios at 31 March 2022 Acid test 0.73 ROCE 11.39% Gearing 87.50% Gross profit for repairs 31.10% Gross Profit for computers 50.60%