CASE STUDY SUNRISE PLC

You are the financial manager of Sunrise plc, a UK-based company. The companys last three years results are set out below.

Income Statement Year Ended 31 December

2007 2008 2009

000 000 000

Sales 2,008 2,010 2,012

Cost of sales (1,406) (1,306) (1,509)

Gross profit 602 704 503

Expenses (474) (584) (417)

Profit before interest & taxation 128 120 86

Interest (13) (22) (20)

Taxation (23) (19) (13)

Profit for the year 92 79 53

Balance Sheet as at 31 December

2007 2008 2009

000 000 000

Assets

Non-current assets

Property, plant, and equipment 660 780 878

Current assets

Inventory 27 45 68

Trade receivables 121 130 134

Cash 30 21 9

178 196 211

Total assets 838 976 1089

Liabilities

Current liabilities (trade payables) (111) (126) (210)

Non-current liabilities (120) (130) (150)

Total liabilities (231) (256) (360)

Net assets 607 720 729

Equity

Ordinary share capital (1 each) 250 300 300

Preference share capital (1 each) 88 100 100

Share premium account 12 25 25

Retained earnings 257 295 304

Total equity 607 720 729

Dividends paid

Preference dividends 8 9 9

Ordinary dividends 27 32 35

Share price 1.07 1.05 0.95

Part A:

You are required to prepare a report to the directors of Sunrise plc. The report should include:

1. Calculate the appropriate ratios which you think may help you to analyse the last three years financial results for Sunrise. (20%)

2. Comment, interpret, and critically evaluate Sunrises business performance in the last three years based on the calculated ratios. (20%)

Part B:

Sunrise is currently making investment appraisals of two potential long-term projects, X and Y. Both projects require the same initial investment of 2m. The following ratios have been calculated for the projects.

Ratios Project X Project Y

Payback period (years) 4 5

Accounting Rate of Return (ARR %) 15 20

Net Present Value (NPV m) 120 145

Internal Rate of Return (IRR %) 16 13

You are, by using any relevant information and calculated ratios from Part A, required to provide recommendations to the directors of Sunrise for a choice of either project X or project Y. Sunrise is not able to undertake the above two projects at the same time or a mixed project of X and Y. (30%)

Part C:

By using any relevant information provided in Part A and Part B, explain and critically evaluate:

Main sources of finance which are available for Sunrise to finance the chosen project in Part B, and (15%)

Major budgeting techniques which can be recommended to support the running of the chosen project successfully. (15%)