Case Study 2 Coconut Palm PLC (CPP') is an unlisted business that manufactures training shoes. The company was founded five years ago and has grown steadily since then. Major expansion is planned for 2022 and 2023. The 'Coconut Palm' brand has grown very quickly. The company's training shoes are seen on television and social media being worn by well-known personalities advertising home fitness equipment. The company sells mainly in Europe but has in place a licence deal with a company in the US that will manufacture and distribute the 'Coconut Palm' branded training shoes in North America in return for a quarterly licence fee. The Board of Directors is concerned that this growth in demand will create cash flow problems and so they have prepared a cash flow forecast to identify any issues with the proposed expansion. Jan m Feb m Mar m Apr m May m Jun m Jul m Aug m Sep m Oct m Nov m Dec m Cash in: Customer receipts Licence receipts Total cash in 1.88 0.00 1.88 1.41 0.00 1.41 1.00 0.50 1.50 0.75 0.00 0.75 0.55 0.00 0.55 0.60 0.50 1.10 0.65 0.00 0.65 0.70 0.00 0.70 0.95 0.50 1.45 1.65 0.00 1.65 2.19 0.00 2.19 2.45 0.50 2.95 Cash out: Supplier payments 0.53 Wages 0.53 Operating costs 0.25 Interest 0.00 Corporate taxation 0.00 Dividends 0.00 Capital expenditure 0.00 Total cash out: 1.31 0.41 0.53 0.25 0.00 0.00 1.00 0.85 3.04 0.35 0.53 0.25 0.00 0.00 0.00 0.00 1.13 0.23 0.53 0.28 0.00 0.00 0.00 0.00 1.04 0.15 0.55 0.28 0.01 0.00 0.00 0.00 0.99 0.15 0.57 0.28 0.02 0.00 0.00 0.35 1.37 0.20 0.57 0.32 0.02 0.00 0.00 0.00 1.11 0.23 0.57 0.32 0.03 0.00 0.00 0.00 1.15 0.27 0.57 0.35 0.04 0.65 0.00 0.00 1.88 0.53 0.53 0.37 0.04 0.00 0.00 0.00 1.47 0.75 0.53 0.39 0.03 0.00 0.00 0.00 1.70 1.03 0.53 0.40 0.02 0.00 0.00 0.00 1.98 Net cash flow Opening cash Closing cash 0.57 (1.63) 0.37 (0.29) (0.44) (0.27) (0.46) (0.45) (0.43) 0.18 0.49 0.97 0.50 1.07 (0.56) (0.19) (0.48) (0.92) (1.19) (1.65) (2.10) (2.53) (2.35) (1.86) 1.07 (0.56) (0.19) (0.48) (0.92) (1.19) (1.65) (2.10) (2.53) (2.35) (1.86) (0.89) The cash flow forecast is based on the following key assumptions: . . . All sales are on 60 days credit, but customers take, on average, 90 days to pay, which is what is reflected in the cash flow forecast. No increases in selling prices are planned. Suppliers, on average, are paid in 60 days. Production is evenly scheduled throughout the year and finished goods are stored for the peak season; opening inventory on 01 January 2022 is 1.25 million and closing inventory on 31 December 2022 is estimated to be 0.90 million. Wages and operating costs are paid in the month incurred. The capital expenditure forecast for 2022 is 0.85 million in February for new plant to increase capacity and 0.35 million in June for new delivery vehicles. Further capital expenditure is planned in 2023 to meet expected demand. Depreciation on assets already owned by CPP on 01 January will be 0.85 million in 2022; the company's depreciation policy is 25% straight line, with a full year depreciation charged in the year of acquisition. . Sales in October 2022, November 2022 and December 2022 are expected to be 2.82million, 2.11 million and 1.99 million respectively. Purchases for November 2022 and December 2022 are expected to be 1.01 million and 0.88 million respectively. CPP's revenues are seasonal, with a peak in the autumn during the lead up to Christmas. The current banking facility (all overdraft) is 1.75million and interest at 6% on any of the facility used. In a recent meeting the company's bank, the Board of Directors was informed that the bank will not increase the existing facility without a material increase in the interest rate. The Board of Directors comprises five directors who between them own 70% of the ordinary shares but have no money to invest any more money in 2022 or 2023. The remaining 30% of the ordinary shares are owned by a variety of individuals that have little interest in participating in company operations and are satisfied just to continue to receive dividends at the levels currently being paid. Required: 1. Calculate CPP's estimated profit before taxation for the year to 31 December 2022. Show all workings. 2. Prepare a report for the Board of Directors of CPP advising of actions it may consider to improve the estimated 2022 cash flow and evaluate the impact of these actions on CPP's business. - 700 maximum word limit) Creditors days Trade payables x 365 Working capital Economic order quantity (EOQ) Cost of capital Cost of equity ke = Do(1+9) + g Purchases 2DC Po or H or Cash management (1) 2NF Z= ke = R + B (Rm - RF) WACC Va ke + ka (1 t) Ve+va Ve+va Parity theory PPPT Cash management (2) X 100 3F02 S= 3 41 Learning curve y = axb Financial ratios Gross margin (%) Gross profit x 100 Revenue Operating margin (%) Operating profit x 100 Revenue Return on capital employed (%) Operating profit Shareholders equity + Long-term debt Return on equity (%) Profit after taxation x 100 Shareholders equity Return on total assets (%) Profit after taxation X 100 Total assets Asset turnover Revenue Total assets Current ratio Current assets Current liabilities Quick test (acid ratio) Current assets - Inventory Current liabilities Working capital turnover Revenue Net working capital Inventory turnover Cost of sales Inventory Inventory days (1+ip) Si = So (1+in) IRPT (1+ip2 Fo = So Financial arithmetic (1+in) Trade creditors X 365 Purchases If 'Purchases' figure not available, use 'Cost of sales'. Financial gearing (%) Long-term debt x 100 Long-term debt + Shareholders equity Interest cover (times) Operating profit Interest charges Earnings per share (EPS) Profit after taxation Number of ordinary shares in issue Price I earnings ratio (PIE) Share price Earnings per share Earnings yield Earnings per share Share price Dividend per share (DPS) Total dividends for the period Number of ordinary shares in issue Dividend cover Profit after taxation Total dividends for the period Dividend payout (%) Total dividends for the period x 100 Profit after taxation or DPS X 100 EPS Dividend yield Dividend per share Share price Effective annual rate of interest [1+]"-1 Present value of! [1 + r)-n Present value of an annuity of 1-(1+r)-1 Variances Sales price (Actual selling price - Budgeted selling price) x Actual units sold Sales volume (Actual units sold Budgeted quantity) Budgeted contribution per unit Material price (Budgeted cost - Actual cost) Actual quantity used Material usage (Budgeted quantity - Actual quantity) Budgeted cost per unit Labour rate (Budgeted rate - Actual rate) * Actual time taken Labour efficiency (Budgeted time - Actual time taken) x Budgeted rate Variable overhead rate (Budgeted rate - Actual rate) Actual time taken Variable overhead efficiency (Budgeted time - Actual time taken) * Budgeted rate Fixed overhead expenditure (Budgeted fixed overhead - Actual fixed overhead) Inventory x 365 Cost of sales Debtors days Trade receivables Revenue X 365 or Trade debtors x 365 Revenue Case Study 2 Coconut Palm PLC (CPP') is an unlisted business that manufactures training shoes. The company was founded five years ago and has grown steadily since then. Major expansion is planned for 2022 and 2023. The 'Coconut Palm' brand has grown very quickly. The company's training shoes are seen on television and social media being worn by well-known personalities advertising home fitness equipment. The company sells mainly in Europe but has in place a licence deal with a company in the US that will manufacture and distribute the 'Coconut Palm' branded training shoes in North America in return for a quarterly licence fee. The Board of Directors is concerned that this growth in demand will create cash flow problems and so they have prepared a cash flow forecast to identify any issues with the proposed expansion. Jan m Feb m Mar m Apr m May m Jun m Jul m Aug m Sep m Oct m Nov m Dec m Cash in: Customer receipts Licence receipts Total cash in 1.88 0.00 1.88 1.41 0.00 1.41 1.00 0.50 1.50 0.75 0.00 0.75 0.55 0.00 0.55 0.60 0.50 1.10 0.65 0.00 0.65 0.70 0.00 0.70 0.95 0.50 1.45 1.65 0.00 1.65 2.19 0.00 2.19 2.45 0.50 2.95 Cash out: Supplier payments 0.53 Wages 0.53 Operating costs 0.25 Interest 0.00 Corporate taxation 0.00 Dividends 0.00 Capital expenditure 0.00 Total cash out: 1.31 0.41 0.53 0.25 0.00 0.00 1.00 0.85 3.04 0.35 0.53 0.25 0.00 0.00 0.00 0.00 1.13 0.23 0.53 0.28 0.00 0.00 0.00 0.00 1.04 0.15 0.55 0.28 0.01 0.00 0.00 0.00 0.99 0.15 0.57 0.28 0.02 0.00 0.00 0.35 1.37 0.20 0.57 0.32 0.02 0.00 0.00 0.00 1.11 0.23 0.57 0.32 0.03 0.00 0.00 0.00 1.15 0.27 0.57 0.35 0.04 0.65 0.00 0.00 1.88 0.53 0.53 0.37 0.04 0.00 0.00 0.00 1.47 0.75 0.53 0.39 0.03 0.00 0.00 0.00 1.70 1.03 0.53 0.40 0.02 0.00 0.00 0.00 1.98 Net cash flow Opening cash Closing cash 0.57 (1.63) 0.37 (0.29) (0.44) (0.27) (0.46) (0.45) (0.43) 0.18 0.49 0.97 0.50 1.07 (0.56) (0.19) (0.48) (0.92) (1.19) (1.65) (2.10) (2.53) (2.35) (1.86) 1.07 (0.56) (0.19) (0.48) (0.92) (1.19) (1.65) (2.10) (2.53) (2.35) (1.86) (0.89) The cash flow forecast is based on the following key assumptions: . . . All sales are on 60 days credit, but customers take, on average, 90 days to pay, which is what is reflected in the cash flow forecast. No increases in selling prices are planned. Suppliers, on average, are paid in 60 days. Production is evenly scheduled throughout the year and finished goods are stored for the peak season; opening inventory on 01 January 2022 is 1.25 million and closing inventory on 31 December 2022 is estimated to be 0.90 million. Wages and operating costs are paid in the month incurred. The capital expenditure forecast for 2022 is 0.85 million in February for new plant to increase capacity and 0.35 million in June for new delivery vehicles. Further capital expenditure is planned in 2023 to meet expected demand. Depreciation on assets already owned by CPP on 01 January will be 0.85 million in 2022; the company's depreciation policy is 25% straight line, with a full year depreciation charged in the year of acquisition. . Sales in October 2022, November 2022 and December 2022 are expected to be 2.82million, 2.11 million and 1.99 million respectively. Purchases for November 2022 and December 2022 are expected to be 1.01 million and 0.88 million respectively. CPP's revenues are seasonal, with a peak in the autumn during the lead up to Christmas. The current banking facility (all overdraft) is 1.75million and interest at 6% on any of the facility used. In a recent meeting the company's bank, the Board of Directors was informed that the bank will not increase the existing facility without a material increase in the interest rate. The Board of Directors comprises five directors who between them own 70% of the ordinary shares but have no money to invest any more money in 2022 or 2023. The remaining 30% of the ordinary shares are owned by a variety of individuals that have little interest in participating in company operations and are satisfied just to continue to receive dividends at the levels currently being paid. Required: 1. Calculate CPP's estimated profit before taxation for the year to 31 December 2022. Show all workings. 2. Prepare a report for the Board of Directors of CPP advising of actions it may consider to improve the estimated 2022 cash flow and evaluate the impact of these actions on CPP's business. - 700 maximum word limit) Creditors days Trade payables x 365 Working capital Economic order quantity (EOQ) Cost of capital Cost of equity ke = Do(1+9) + g Purchases 2DC Po or H or Cash management (1) 2NF Z= ke = R + B (Rm - RF) WACC Va ke + ka (1 t) Ve+va Ve+va Parity theory PPPT Cash management (2) X 100 3F02 S= 3 41 Learning curve y = axb Financial ratios Gross margin (%) Gross profit x 100 Revenue Operating margin (%) Operating profit x 100 Revenue Return on capital employed (%) Operating profit Shareholders equity + Long-term debt Return on equity (%) Profit after taxation x 100 Shareholders equity Return on total assets (%) Profit after taxation X 100 Total assets Asset turnover Revenue Total assets Current ratio Current assets Current liabilities Quick test (acid ratio) Current assets - Inventory Current liabilities Working capital turnover Revenue Net working capital Inventory turnover Cost of sales Inventory Inventory days (1+ip) Si = So (1+in) IRPT (1+ip2 Fo = So Financial arithmetic (1+in) Trade creditors X 365 Purchases If 'Purchases' figure not available, use 'Cost of sales'. Financial gearing (%) Long-term debt x 100 Long-term debt + Shareholders equity Interest cover (times) Operating profit Interest charges Earnings per share (EPS) Profit after taxation Number of ordinary shares in issue Price I earnings ratio (PIE) Share price Earnings per share Earnings yield Earnings per share Share price Dividend per share (DPS) Total dividends for the period Number of ordinary shares in issue Dividend cover Profit after taxation Total dividends for the period Dividend payout (%) Total dividends for the period x 100 Profit after taxation or DPS X 100 EPS Dividend yield Dividend per share Share price Effective annual rate of interest [1+]"-1 Present value of! [1 + r)-n Present value of an annuity of 1-(1+r)-1 Variances Sales price (Actual selling price - Budgeted selling price) x Actual units sold Sales volume (Actual units sold Budgeted quantity) Budgeted contribution per unit Material price (Budgeted cost - Actual cost) Actual quantity used Material usage (Budgeted quantity - Actual quantity) Budgeted cost per unit Labour rate (Budgeted rate - Actual rate) * Actual time taken Labour efficiency (Budgeted time - Actual time taken) x Budgeted rate Variable overhead rate (Budgeted rate - Actual rate) Actual time taken Variable overhead efficiency (Budgeted time - Actual time taken) * Budgeted rate Fixed overhead expenditure (Budgeted fixed overhead - Actual fixed overhead) Inventory x 365 Cost of sales Debtors days Trade receivables Revenue X 365 or Trade debtors x 365 Revenue
