The instructions are attached below. Please use an Excel file. Thanks

4E6 COURSEWORK 2016-17 Please submit Sections A and B separately via the respective online submission links on Moodle. Please use a separate cover sheet for each section. The submission deadline is 4pm on Friday 27th January 2017. SECTION A - ACCOUNTING QUESTION 1 [20 marks] 'Best Advice for You Ltd.' was launched on 1 January, Year 1, offering consulting services. Shareholders contributed 160,000 to the business and the business further arranged a bank overdraft (initially 320,000). All of these funds were used to buy cars for trips to clients, to lease an office and to hire assistants. The business' opening balances were: Best Advice for You Ltd. Trial Balance as at 01.01.1 Dr Cr Fixed assets 480,000 Bank overdraft 320,000 Share capital 160,000 480,000 480,000 'Best Advice for You Ltd.' engaged in the following transactions during its first year of trading (all transactions in 000; all cash transactions conducted via the overdrawn bank current account): 1. Bills totalling 2,400 were sent to clients. 2. 1,600 was received from those clients. 3. 2,000 was paid in operating expenses (including salaries to the assistants, computer hire, online information services, etc.) 4. A bill was received for 200, for office rent for Year 1, payable in arrears in January, Year 2. 5. Depreciation on company cars was taken into consideration (assuming straightline method, 10 years of useful economic life and 80,000 of residual value). 6. Bank interest of 140 was paid. Requirements: a) Record in journal form how you deal with transactions 1 - 6. [6 marks] b) Write up the business' ledger for the year (including separate accounts for various expenses). [2 marks] c) Draw up the trial balance as at 31.12.1. [2 marks] 1 d) Produce a profit and loss account for the year ended 31.12.1. [2 marks] e) Produce the closing balance sheet as at 31.12.1. [3 marks] f) The auditors advise the business that a provision for doubtful debts at 5% of the closing debtors' figure should be made. Without restating your previous calculations, describe the impact of recognising this provision in the financial statements. [2 marks] g) How would you evaluate the capital structure of the business and its potential to raise additional debt in the future? [3 marks] QUESTION 2 [30 marks] You are asked to read through the latest Annual Report & Accounts for SABMiller PLC and Diageo PLC (these are available on Moodle). SABMiller PLC was created in 2001 when South African Breweries (SAB) PLC acquired Miller Brewing Company of the US to form the world's second largest brewer by volume. The group's wide portfolio of brands includes premium international beers as well as leading local brands. SABMiller is also one of the world's largest bottlers of Coca-Cola products. In October 2016, SABMiller was acquired by Dutch Anheuser-Busch InBev for 79bn, the third-largest corporate takeover on record. For comparison and context, you are also given the latest Annual Report & Accounts for Diageo PLC, the market leader in the sector of beverage alcohol products. Using the information in the Annual Reports, retrieve the following data for each company (note: data should reflect the consolidated financial statements): Balance Sheet extracts: amounts in million or $ respectively 2016 2015 Non-current (fixed) assets Current assets Inventories Trade receivables Cash & cash equivalents Total assets Current liabilities Trade payables Total (short- & long-term) borrowings Non-current liabilities Total equity Equity attributable to ordinary shareholders 2 Income Statement extracts for 2016 (amounts in million or $ respectively): Net sales revenue Cost of sales (or Cost of inventories expensed) Gross profit Operating profit Net finance costs Net profit attributable to ordinary shareholders Stock market data for 2016: Weighted average number of ordinary shares in issue (in millions) Total dividends declared during the year (in million or $ respectively) Total dividends paid during the year (in million or $ respectively) Both companies are (or were, up until at least their financial-year end) listed on the London Stock Exchange (FTSE 100). Information regarding their share price is given below: Share price at the beginning of the financial year (in p) Share price at financial-year end (in p) SABMiller Diageo 3,570.0 4,256.0 1,874.0 2,086.5 Other information for 2016: Average number of equivalent (in 000s) employees, full-time Requirements: a) Using the information you have gathered, calculate appropriate ratios in order to evaluate the profitability, efficiency, liquidity, financial leverage and investment attractiveness of the two companies for the year 2016. [15 marks] b) Write up a report (not to exceed 1,000 words) discussing what the financial ratios in (a) suggest regarding the financial performance of the two companies and the state of their finances for the year 2016. How do the companies compare? Why was SABMiller an attractive takeover target? What further information would have been particularly useful in improving your assessment of the two companies? [15 marks] 3 SECTION B - FINANCE QUESTION 3 [50 marks] In March 2008, Tom Lafontaine, CEO of Avalanche Logistics, a trucking company, was evaluating a new proposal that would require substantial investment. This project was of particular importance as it would represent a new source of revenue - one that is badly needed. The investment involves branching out into a new business. Lafontaine, therefore, had to decide whether his company should immediately start the project. From trucking to shipping Avalanche Logistics owned a huge fleet of trucks that deliver valuable goods across the UK and Europe. Founded in 1923, the company had grown substantially. In the mid-fifties, it was one of the largest trucking companies in the UK. However, in the 1970s, after the oil crisis when petrol prices skyrocketed, Avalanche Logistics has been on the decline. Severe competition almost drove the company into bankruptcy. Various CEOs had been appointed to revive the company but without much success. But that was until Tom Lafontaine. He joined the company as the CFO in 1999, having spent his earlier career at one of the largest investment banks. In 2003, he was made the CEO and tasked with restoring the former glory of the company. Having saved the ailing Avalanche Logistics and turned it into one of the most profitable companies within the trucking industry, Lafontaine ought to have many reasons to be happy. Yet, he was not. This was because he knew that the profit margin for the trucking company would become increasingly razor thin as other nontrucking firms had been entering the market. This worried him. At a meeting with the senior management of the company in November 2007, he put forward such concerns and asked the senior executives to come up with new ways to ensure that Avalanche Logistics could remain profitable. Avalanche Shipping In the follow-up senior management meeting that took place in January 2008, Evans Engel, a newly recruited business development executive from a major shipping company, proposed that Avalanche Logistics might want to consider moving into a completely new line of business to create a new stream of revenue. Specifically, he suggested that the company could expand into the sea logistics business. Engel and his team identified a certain number of sea routes that the company could realistically serve in the near future. In order to serve these sea routes, Avalanche Shipping, a newly created division within Avalanche Logistics, would need to purchase a fleet of vessels. Having done some prior research and relying on his experience, Engel identified that the vessel that could best meet the requirements of Avalanche Shipping was a fleet of ships called Kaleidoscope, the latest type of 4 transport vessel in the industry of sea logistics. He also collected the following information for further analysis: Investment: The price tag attached to a fleet of Kaleidoscope was 839 million. The investment would be made in 2009. Availability and longevity: Given that the construction of the fleet was already underway, it would be able to enter service on the first day of 2010. Since each Kaleidoscope was constructed with a special material for the body as well as advanced technologies and the latest design for its turbines, the vessel would have an operational life of 8 years. At the end of the eighth year, it would carry no salvage value. Revenue: This new service was expected to generate revenue of 400 million in 2010. After 2010, revenues would increase by 21% every year. Costs: Each fleet of Kaleidoscope had two categories of costs. Operational costs such as fuel, labour and insurance would account for 23% of revenue every year. The use of special material on Kaleidoscope meant that maintenance costs (including replacement parts and servicing) differ in the span of its life. As a result, maintenance costs accounted for 7% of the annual revenues in the first four years. In the four years that follow, maintenance costs would decrease to 6% of the annual revenues. Depreciation: Engel calculated that the vessel should be depreciated according to the schedule stated in exhibit 1. Working capital: Engel also prepared a projected working capital schedule, which is shown in exhibit 2. Cost of capital: Avalanche Logistics had been using 17% as the cost of capital for all of its investment decisions. But this cost of capital was solely related to the company's trucking business. It did not reflect the risk Avalanche Logistics would undertake in the business at sea. Hence, having discussed it with the CFO, Lafontaine believed that 20% would be a more appropriate cost of capital to take the additional risk into consideration. Tax rate: The company's tax rate is 32%. In determining whether to go ahead with this project, Lafontaine thought it was critical to use the above information to assess the value of the project. All in all, senior managers were excited about the possibility of expanding into sea transport but they wanted to be sure they would be making a sound investment decision. 5 Requirements: a) Assess the financial viability of this project by calculating its Net Present Value (NPV). [25 marks] b) Make a plot of the NPV as a function of the cost of capital and determine the Internal Rate of Return (IRR) of the project. [10 marks] c) Conduct relevant breakeven, sensitivity and scenario analysis and make your recommendations whether the company should embark on the project. [15 marks] Exhibit 1. Depreciation Schedule Source: Case writer Exhibit 2. Projected Working Capital (in 000s) Source: Case writer 6