M004LON – Managerial Finance
M004LON – Managerial Finance
Individual Coursework – Module Coursework 2 – April/July 2017
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[Contributes to 60% Module mark]
Case Study – Orion Limited.
Submission date: displayed on Moodle M004LON front page
CASE STUDY: Orion Limited
Orion Limited is a limited company, whose head office in based in South Africa. The company
has been operation in the UK for the past 10 years. Orion provides financial services to a
number of organisations which include SME’s, property developers and investment property
funds in the UK and Africa. For the past 15 years, Orion has been a profit making firm as it has
retained its previous clients, in addition to capturing an increasing share of the market.
However, the finance director of Orion has recently got in touch with your professional
consulting firm has engaged your firm with the mandate to provide them with an explanation
of the cash flow problem that Orion Limited had been facing. The company is also dependent
on the parent based in South Africa for and when required.
In the past 2 weeks there has been a number of meetings in London and South Africa where
it has been agreed that Orion Limited should do its best to raise capital in England or Europe
so as not to depend so much on cash coming from the parent company all the time.
The current product that Orion Limited has to offer mostly to property developers and
investment funds companies is outdated. The company is looking to invest in a new product.
The details of the proposal are outlined below.
Super Suite Draft Figures £’000 Year 0 1 2 3 4 5 New Software Cost 7200 Working Capital 600 Sales Revenue Less: Component AK ( ) ( ) ( ) ( ) ( ) Component NK ( ) ( ) ( ) ( ) ( ) Overheads (1800) (1800) (1800) (1800) (1800)
Super Suite is the first of two proposals, the expected life of this software will be 5 years and
its working capital requirements, the cost of the new software, expected revenue,
components cost and overheads are as follows;
All of the above estimates have been prepared in terms of present day costs and prices.
Assume that the cash flow arise at the end of each period. In addition the following
information has been given:
Revenues and overheads are expected to rise by 5% per year from year 1. The units of
sales will be 6000 units in year 1 and this will go up each year by 10% based on previous
year’s sales. The project will require working investment equal to 8% of expected sales revenue. The cost of component AK are expected to rise in line with inflation of the 3 % per year
from year 1, and these will be based on units of sales done. Overheads cost will be fixed for the whole period of the project. Each package of software will be sold at £4800. The costs of Specialist Technology Managers (STM), who have come from South Africa
have not been taken into consideration in the forecast and are as follows: o STM 1: will be paid £190 per hour and expected number of hours for
STM1 are 1,420. The rate paid is expected to rise in line with inflation
at 3% per year from year 2 and the number of hours is expected to
reduce by 3% per year, every year from year 2 onwards.
o STM2: will be paid £160 per hour and expected number of hours for
SMT2 are 1,820. The rate paid is expected to rise in line with inflation
at 3 % per year, every year from year 2 onwards.
If Orion Limited invests in Super Suite then the discount rate that will be required to assess
the NPV would be 12%. Assume that cash flows arise at the end of each period.
Opening of New Office
You will also work in collaboration with the London office manager to prepare cash budget
will be part of the report, but should be included in the appendix. The London office has plans
of opening a consultancy office near Liverpool Street. It is hoped that this store will be opened
for business on 1st August 2018. You have also been informed that to start with, the company
will only offer two of the most popular services for a period of 3 months from August to
October 2018. This will be done to test the market and see if the business will break-even in
the same period. The two most popular services to be offered will be the Business Planning
(BP) for SME’s and the other is Strategy design (SD).
The company has provided you with the following information regarding the costs and estimated sales for the period mentioned above.
Orion Consultancy plan to put in £6,000 as start-up capital and plan to sale up to 9500
consultancy services (combined) of BP and SD during the same period. They are not sure
which of the two products will produce the best profit for the company. The company will
have to offer a minimum of 1,500 services each month to ensure that that they meet the
requirements of the supplier.
Total consultancy services for each month are as follows: August 3000, September 3,000 and
October 3,500 of which 2,000 will be (SD).
To help with the setup of the store they company has just concluded a deal with one of the
high street banks to get a loan of £48,000 on the 1st of August 2018. The interest on this loan
will be 3% to be paid every month. The company will be required to make 12 equal payments
to repay the loan every 3 months starting end of October 2018.
The assistant manager has also requested that you do provide them with some information
on the importance of budgeting in the consultancy industry, as this is all new to them and this
is the first time they are doing a project like this.
As mentioned above the company plans to sell a total of 9,500 services between August and
October 2018. Customers are prepared to pay £15 for the BP and £18 for SD. The fixed costs
for the period are as below:
The company will be bring in an expert at £12 for BP and £15 each for the SD. The fixed costs
are for the whole period so they are not affected by the level of sales, on the other hand
variable costs (cost of expert) will increase with sales output, and thus it is sales output
multiplied with variable cost per product.
The suppliers of the experts have agreed to supply the company the first experts of required
services on credit to be paid end of August 2018. Thereafter, all experts supplied will be paid
as 60% cash and 40% the following month. Revenue from consultancy will be on the basis of
80% cash and 20% credit to be paid the following month.
New Company Acquisition
Orion Limited is also considering to grow its operations across continental Europe, and at the
moment there are two potential target companies that can help Orion in creating a presence
in Europe, Madison Fund Holland and Ulendo Financial Services Spain. For the purpose of this
analysis, assume that the required investment funds can be sourced from parent company or
Orion can source these funds from other sources. It should be noted that Orion is only willing
to acquire only one of the companies. The data for the past three years is given below:
£ Rent 13,000 Business rates 2,100 Loan interest 1,440 Insurance 1,100 Other fixed cost 2,050 19,690
Madison Fund Holland £’000 Ulendo Financial Services Spain £,000 Income Statement 2014 2015 2016 2014 2015 2016
Turnover 8,406 9,812 10,516 14,529 16,849 19,516 Administrative Expense (6,012) (6,643) (7,102) (16,926) (19,455) (22,362) Operating profit/(Loss) 2,394 3,169 3,414 (2,397) (2,606) (2,846) Interest receivable and simlar income 12 14 32 30 34 39 Interest payable and similar charges (38) (44) (26) (19) (22) (26) Profit/ (Loss) on ordinary activities 2,368 3,139 3,420 (2,386) (2,594) (2,833) Tax (710) (942) (1,026) Net profit/(Loss) 1,658 2,197 2,394 (2,386) (2,594) (2,833)
Fixed Assets Intangible fixed assets 4,721 5,426 3,577 3,235 3,719 4,274 Tangible fixed assests 1,458 1,676 2,250 5,785 6,649 7,643 6,179 7,102 5,827 9,020 10,368 11,917 Current Assets Debtors: amounts falling due after more than one year 468 536 409 579 666 765 Debtors: amounts falling due after within one year 2,679 3,080 6,322 3,847 4,422 5,083 Cash at bank and in hand 730 840 1,599 1,298 1,349 1,404 3,877 4,456 8,330 5,724 6,437 7,252 Creditors: amounts falling due within one year (2,184) (1,489) (1,693) (9,834) (13,490) (17,687) Net current assets / (liabilities) 1,693 2,967 6,637 (4,110) (7,052) (10,435) Total assets less current liabilities 7,872 10,069 12,464 4,910 3,315 1,482 Net assets/ (Liabilities) 7,872 10,069 12,464 4,910 3,315 1,482
Capital Reserves Called up share capital (£1 nomial shares) 100 100 100 450 450 450 Share premium account 1,805 1,805 1,805 Capital redemption reserve 2 2 2 Profit and Loss account 5,965 8,162 10,557 4,460 2,865 1,032 Shareholder’s funds/ (deficit) 7,872 10,069 12,464 4,910 3,315 1,482
You will be required to write a management report to the management of Orion in which the following points should be discussed. A detailed Literature Review of the tools you have used such as cash budgets, breakeven analysis, NPV and ratios and their importance to business. Provide an explanation on the different sources of funding (3 maximum) the company can use and their advantages and disadvantages and make recommendations as to how the company can manage the same to help in the planned expansion program. Analyse the Investment proposal by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Orion may use, and the limitations of using those techniques A computation of your breakeven analysis and the cash budget for the first 3 months. What other factors may a firm take into account when making investment decisions. Based on the information provided and to the extent possible, perform ratio analysis and make recommendations as to which company they should be looking to invest ¡n. What other information will help you in making an informed decision on ratio analysis. Presentation of your work – Week 10 (summary – key is the NPV computation, cash Budget and decisions made) An evaluation of company performance or position during the same period Other issues for management to consider that you think are vital for them to survive and make a profit.
Group Management Report (word count 2,200) should include: Title Sheet Executive Summary Contents Page Introduction Literature review to support your accounting models used. Sources of Funding Investment appraisal using NPV Breakeven analysis Cash budgeting Ratio analysis Evaluation Any other issues to be considered. Conclusions and Recommendations Appendixes
Individual submission of coursework based on company performance, budgeting and financial decision making:
Coursework Submission should include: Evidence of research.
1. Select and apply appropriate accounting techniques to critically analyse financial data in a variety of business decision making scenarios 2. Make informed financial judgements based on the outcome of such accounting analyses 3. Critically appraise the techniques used and the information to which they have been applied 4. Understand the objectives of preparing management information and the need to adapt techniques in a changing commercial environment 5. Apply techniques to evaluate management decisions in relation to costing, pricing, product range and marketing strategy 6. Identify and apply appropriate budgeting techniques to enable management to control the Business
Reading Essential Reading
Proctor, R. (2006) Managerial Accounting for Business Decisions Edition 2, FT Prentice Hall, Harlow, ISBN 0-273-68155-9
Penman, S. (2007), Financial Statement Analysis and Security Valuations, 3rd Edition, McGraw Hill
Ross, S.A., Westerfield, R. and Jaffe, J. (2007) Modern Financial Management, McGraw Hill Education, UK
Students will be directed to additional sources, such as web-links, academic journals, professional and trade publications through the Module Web.
Literature review to support your accounting models used 10% Sources of Funding 10% Investment appraisal using NPV 10% Breakeven analysis 10% Cash budgeting 10% Ratio analysis 10% Evaluation 10% Any other issues to be considered 10% Conclusions and Recommendations 5% Professional format 5% Presentation (week 10) 10%
PLAGIARISM WARNING! —Assignments should not be copied in part or in whole from any
other source, except for any marked up quotations, that clearly distinguish what has been
quoted from your own work. All references used must be given, and the specific page number
used should also be given for any direct quotations, which should be in inverted commas.
Students found copying from the Internet or other sources will get zero marks and may be
excluded from the university.
Word Count – Any work submitted with more than 2200 words will be have 10 marks
The allocation of marks will be based on the Assessment Rubrics for the Regular Assignment.
Location: Room TBC
Time slots arrangements: TBC
Please note that you should arrive in good time before your session starts. Students who are
absent or late will receive a zero mark.