FINANCIAL DECISION MAKING

Case Study 1 A multinational company, Worldwide Products Inc. (WPI), is looking to award a franchise to a British company to be the sole distributor of all its products in the UK. After much investigation and research, the Board of Directors of WPI has identified four companies that meet its requirements. All these companies are keen to win the franchise. Coojelli Ltd is a very large distribution company that has been in business for many years. Park Ltd is a small niche player in the distribution market. Freuchan Ltd has also been trading for a long time but is only a fraction of the size of Coojelli. Hacraig Ltd, on the other hand, is a relative newcomer to the distribution market but is experiencing significant recent growth. All four companies have been judged as more or less of equal capability from a logistics viewpoint, there being no obvious winner. Each has the operational capacity to handle the WPI franchise. So the Board has determined that the final choice will be down to relative financial strength and performance of the four companies. The Board now wishes to examine the key financial figures on each of the companies and award the franchise to the company with the strongest financials. The CFO has obtained the financial statements of each of the companies and from these has extracted the following table of figures. Coojelli Ltd Park Ltd Freuchan Ltd Hacraig Ltd 2020 2019 2020 2019 2020 2019 2020 2019 '000 '000 '000 '000 '000 '000 '000 '000 Income Statement Revenue 26,500 15,900 454 450 860 820 2,000 1,500 Cost of sales 18,200 12,100 340 300 622 600 1,700 1,305 Operating profit/(loss) 250 280 2 1 (18) (2) 43 35 Statement of financial position Non-current assets 3,000 2,500 194 123 168 132 251 248 Inventory 2,106 1,329 84 80 125 162 140 136 Trade receivables 1,573 921 72 83 49 80 102 75 Bank and cash 1,681 634 1 1 1 2 78 104 Trade payables 2,760 2,113 85 79 166 155 155 148 Required: 1. Analyse the figures by calculating whatever ratios you think appropriate. (Show clearly all workings.) (8 marks) 2. On the basis of your analysis in Requirement 1, explain in detail which of the four companies is most likely to be awarded the distribution franchise and your reasons for your choice. (12 marks maximum word count 500 words) On a different matter entirely, WPI's Directors have been discussing the company's dividend policy. The CEO is in favour of financing all investment using retained earnings and other internally generated funds and limiting dividends. She argues that a high level of retentions will save issue costs, and that declaring dividends always results in a fall in share price when the shares are traded after the dividend is paid. 3. Discuss critically the CEO's arguments about the effect of her proposed dividend policy on share price that you consider to be relevant. (10 marks maximum word count 400 words) Case Study 1 A multinational company, Worldwide Products Inc. (WPI), is looking to award a franchise to a British company to be the sole distributor of all its products in the UK. After much investigation and research, the Board of Directors of WPI has identified four companies that meet its requirements. All these companies are keen to win the franchise. Coojelli Ltd is a very large distribution company that has been in business for many years. Park Ltd is a small niche player in the distribution market. Freuchan Ltd has also been trading for a long time but is only a fraction of the size of Coojelli. Hacraig Ltd, on the other hand, is a relative newcomer to the distribution market but is experiencing significant recent growth. All four companies have been judged as more or less of equal capability from a logistics viewpoint, there being no obvious winner. Each has the operational capacity to handle the WPI franchise. So the Board has determined that the final choice will be down to relative financial strength and performance of the four companies. The Board now wishes to examine the key financial figures on each of the companies and award the franchise to the company with the strongest financials. The CFO has obtained the financial statements of each of the companies and from these has extracted the following table of figures. Coojelli Ltd Park Ltd Freuchan Ltd Hacraig Ltd 2020 2019 2020 2019 2020 2019 2020 2019 '000 '000 '000 '000 '000 '000 '000 '000 Income Statement Revenue 26,500 15,900 454 450 860 820 2,000 1,500 Cost of sales 18,200 12,100 340 300 622 600 1,700 1,305 Operating profit/(loss) 250 280 2 1 (18) (2) 43 35 Statement of financial position Non-current assets 3,000 2,500 194 123 168 132 251 248 Inventory 2,106 1,329 84 80 125 162 140 136 Trade receivables 1,573 921 72 83 49 80 102 75 Bank and cash 1,681 634 1 1 1 2 78 104 Trade payables 2,760 2,113 85 79 166 155 155 148 Required: 1. Analyse the figures by calculating whatever ratios you think appropriate. (Show clearly all workings.) (8 marks) 2. On the basis of your analysis in Requirement 1, explain in detail which of the four companies is most likely to be awarded the distribution franchise and your reasons for your choice. (12 marks maximum word count 500 words) On a different matter entirely, WPI's Directors have been discussing the company's dividend policy. The CEO is in favour of financing all investment using retained earnings and other internally generated funds and limiting dividends. She argues that a high level of retentions will save issue costs, and that declaring dividends always results in a fall in share price when the shares are traded after the dividend is paid. 3. Discuss critically the CEO's arguments about the effect of her proposed dividend policy on share price that you consider to be relevant. (10 marks maximum word count 400 words)