Financial Management AC60047E
Assignment 1 - 2014/15
The written assignment consists of 2 parts. Each part must be clearly identified by starting on a new page.
Part 1 – 30%
1.1 Consider the following potential events that might have taken place at Vodafone Group Plc on 31 March, 2012. For each one, indicate which line items in Vodafone’s balance sheet would be affected and by how much. Also indicate the change to Vodafone’s book value of equity. (In all cases, ignore any tax consequences for simplicity.) (10 points)
Vodafone used £200 million of its available cash to repay £200 million of its long-term debt.
a) If they have used all of its available money to repay its debt, hence the non-current liabilities and the cash would diminish by the same amount, which would not affect to the book value of equity.
A warehouse fire destroyed £50 million worth of uninsured inventory.
b) The book value of equity will diminish likewise the inventory by £50 million. c.
Vodafone used £50million in cash and £50 million in new long-term debt to purchase a £100million of buildings worldwide. c) It is noticeable that the non-current assets would enlarge by £100 million; similarly the non-current liabilities would increase by £50 million, however, the cash on the balance sheet will diminish by £50 million. No change is expected to occur to the book value of equity. d.
A large customer owing £20million for products it already received declared bankruptcy, leaving no possibility that Vodafone would ever receive payment. d) The book value of equity would decrease by £20 million, as well as the account receivables. e.
A key competitor announces a radical new pricing policy that will drastically undercut Vodafone’s prices. e) Naught is supposed to influence on the balance sheet.
1.2 In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million. (10 points) a.
Compare the gross margins for Starbucks and Peet’s.
Gross Margin (SBUX)= $ 6.75 billion/$11.70 billion
Gross Margin (SBUX)= 54.54 %
Gross Margin (PEET)= $72.7 million/$372million
Gross Margin (PEET)= 19.54%
Compare the net profit margins for Starbucks and Peet’s.
Net Profit Margin (SBUX)= $1.25 billion/$11.70 billion
Net Profit Margin (SBUX)= 10.7%
Net Profit Margin (PEET)= $17.8 million/$372 million
Net Profit Margin (PEET)=4.8%
Which firm was more profitable in 2011?
The Gross margin ratio indicates the profitability of a company (Watson and Head 2013). The higher values indicate that more cents are earned per dollar of revenue. In this case, Starbucks was more profitable and favorable because more profit was available to cover non-production costs. In the same way, the operating profit margin shows the efficiency of how have costs been operated in making profit sales. So, virtually, it is obvious that Starbucks Corporation was performing better than PEETS Coffee and Tea in year 2011. 1.3 Your firm has identified three potential investment projects. The projects and their cash flows are shown here: (10 points)
Suppose all cash flows are certain and the risk-free interest rate is 10%. a.
What is the NPV of each project?
NPV project A= (-10)/(1.1) 0 + 20/(1.1) 1
NPV project A= (-10) – 18.18
NPV project A= $8.18
NPV project B= 5/(1.1) 0 + 5/(1.1) 1
NPV project B= 5 + 4.54
NPV project B= $9.54
NPV project C= 20/(1.1) 0 + (-10)/(1.1) 1
NPV project C= 20 + (-9.09)
NPV project C= $10.91
If the firm can choose only one of these projects, which should it choose?
Project C should be undertaken as it has the highest Net Value present and will benefit with increase in shareholder capital.
If the firm can choose any two of these projects, which should =it choose?
In fact all three...
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