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Task I:
The management has a concern about the financial performance of one of their subsidiaries in the UK, i.e. Spiky Hairgel, that seems to miss its production target in Sep 2025. However, the management of this subsidiary is still arguing that they are still producing higher income from operations and total contribution that are higher than the budget, based on flexible budgeting analysis. The CFO needs you to undertake the flexible budgeting variance analysis, especially in looking at how costs have been controlled in this subsidiary.
The budgeted production, price and costs are as follow (all figures are in poundsterling):
| Production (units) | 34,000 |
| Budgeted Sales Revenue | 297,500 |
| Variable costs: | |
| Natural essence | 85,000 |
| Chemical materials | 34,000 |
| Packaging materials | 34,000 |
| Direct labour | 68,000 |
| Fixed costs: | |
| Depreciation—machinery | 6000 |
| Depreciation—building | 3000 |
| General liability insurance | 800 |
| Facility rent | 1500 |
| Marketing expense | 2000 |
| Utilities for admin offices | 1000 |
| Other administrative expense | 800 |
The actual results of production, price and costs are as follows (all figures are in poundsterling):
| Production (units) | 30,000 |
| Price per Unit | 9.50 |
| Total Variable Costs: | |
| Natural essence | 60,000 |
| Chemical materials | 37,500 |
| Packaging materials | 27,000 |
| Direct labour | 75,000 |
| Fixed costs: | |
| Depreciation—machinery | 5500 |
| Depreciation—building | 3000 |
| General liability insurance | 900 |
| Facility rent | 2000 |
| Marketing expense | 3000 |
| Utilities for admin offices | 850 |
| Other administrative expense | 1000 |
Your Tasks:
- Prepare a Flexible Budgeting report showing Spiky Hairgel revenue and spending variance for Sep 2025. Use 0 decimal points in your analysis (except for price per unit, contribution per unit and cost per unit – use 2 decimal point in these).
- In your report, analyse the variance for each
- The management does not understand the concept of total contribution. They ask you to give a critical analysis of the concept of total contribution and its relationship
to the breakeven sales and breakeven unit (especially on how to derive breakeven sales and breakeven unit mathematically from Total Contribution).
Task II:
The management is interested in acquiring Dreamdove PLC, a non-traded public-listed company that produces baby foods and has been operating for awhile in UK baby food industry. The management is particularly interested to acquire this company’s assets to strengthen its own baby foods subsidiary. However, since Dreamdove PLC is a non- traded PLC, the management only has incomplete income statement for the year ended 31 December 2022, 31 December 2023 and 31 December 2024, as well as incomplete balance sheet as at 31 December 2023 and 31 December 2024. The CFO asks you to analyse Dreamdove PLC financial situation and propose a valuation that the management can use in negotiation.
Upon preliminary investigation, you managed to discover these facts to complete the financial statements:
For Income Statements:
- Cash sales had increased by 12% from 2022 to 2023, and then increased again by 5% to 2024.
- Credit sales had steadily increased by 15% from 2022 to 2023, and from 2023
to 2024.
- Proportion of Cost Sales to Total Net Revenues is 53% in 2022, 55% in 2023
and 60% in 2024.
- Salaries in 2023 is 94% of that in 2024, and salaries in 2022 is 94% of that in
2023.
- Insurance expense in 2023 is 75% of that in 2024, and insurance expense in 2022 is 80% of that in 2023.
- Depreciation in 2023 is 90% of that in 2024, and depreciation in 2022 is 90% of
that in 2023.
- Income Tax is 35% of Earning Before Tax (EBT) or Profit Before
For Balance Sheet:
- Account Receivable at the end of 2024 and 2023 is 1/6 of credit sales in 2024 and 2023, respectively.
- Inventories at the end or 2024 is 1/6 of Net Revenues in 2024, and inventories at the end of 2023 is 6% of Net Revenues in 2023.
- Prepaid Expenses at the end of 2024 increased by £34,000 from that at the end of 2023.
- Accounts Payable in 2024 is 8% of 2024 Cost of Sales, whilst Accounts Payable in 2023 is lower by £187,000 than that in 2024.
- Accrued wages in 2024 and 2023 are both 25% of Salaries in 2024 and 2023, respectively.
- Accrued taxes in 2024 is 25% of 2024 Income
- Long-term debt in 2023 is 80% of Property, Plant and Equipment in
Your Tasks:
- Complete the Income Statement and Balance Sheet below (using 0 decimal point):
| DREAMDOVE PLC | ||||
| INCOME STATEMENT FOR THE PERIOD ENDED | ||||
| 31-Dec-24 | 31-Dec-23 | 31-Dec-22 | ||
| £ ‘000s | £ ‘000s | £ ‘000s | ||
| Net revenues | ||||
| Cash Sales | 2,456 | |||
| Credit Sales | 4,572 | |||
| Total Net Revenues | 8,009 | |||
| Cost of Sales | 3,725 | |||
| Gross Profit | 3,574 | |||
| Operating Expenses: | ||||
| Salaries | 1,258 | |||
| Insurance | 155 | |||
| Depreciation | 150 | |||
| General and administrative expenses | 489 | 479 | 361 | |
| Total operating expenses | 1,913 | 1,687 | ||
| Operating Profit (EBIT) | ||||
| Interest expense | 10 | 11 | 11 | |
| Profit before income taxes (EBT) | 1,680 | |||
| Income taxes | ||||
| Net Profit | ||||
| DREAMDOVE PLC | |||
| BALANCE SHEET AS AT | |||
| 31-Dec-24 | 31-Dec-23 | ||
| £ ‘000s | £ ‘000s | ||
| ASSETS | |||
| Current assets: | |||
| Cash and cash equivalents | 1,369 | 1,427 | |
| Accounts receivable, net | |||
| Inventories | |||
| Prepaid expenses and other current assets | 200 | 166 | |
| Total current assets | |||
| Property, plant and equipment, net | 3,137 | 2,287 | |
| Other assets | 168 | 161 | |
| Total non-current assets | |||
| TOTAL ASSETS | 7,371 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||
| Current liabilities: | |||
| Accounts payable | |||
| Accrued wages | |||
| Accrued taxes | 141 | ||
| Current portion of long-term debt | 89 | 82 | |
| Total current liabilities | 754 | 563 | |
| Non-current liabilities: | |||
| Long-term debt | 2,630 | ||
| Total liabilities | 3,384 | ||
| Shareholders’ equity: | |||
| Ordinary shares, issued and outstanding (£0.1 par value) | 350 | 350 | |
| Share premium | 2,415 | 2,415 | |
| Retained earnings | 1,222 | 241 | |
| Total shareholders’ equity | |||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | 5,398 | ||
Please provide the working notes / calculations for each information above to prove your calculations for each entry that needs to be completed for income statement, and balance sheet.
- Prepare a Cash Flow Statement for 2024 with data from Balance Sheet and Income Statement in 2024 and 2023 (using 0 decimal point).
As an additional information, in the Property, Plant and Equipment, Net in the 2024 Balance Sheet there is a gain from the sales of old PPE of £1,000 which is already recognised in the Cash Flow Statement provided below.
You must complete the item name (the dotted line) and provide the working notes / calculations of each blank item below.
The Cash Flow Statement template is as follows:
| DREAMDOVE PLC | ||||||
| CASH FLOW STATEMENT FOR THE PERIOD ENDED 31 DECEMBER 2024 | ||||||
| £’000s | ||||||
| Cash Flow from Operating Activities: | ||||||
| Net Income | ||||||
| Non-cash Adjustment: less gain from selling old PPE | -1 | |||||
| Depreciation | ||||||
| Less: Increase in ………….. | ||||||
| Less: Increase in …………….. | ||||||
| Less: Increase in …………….. | ||||||
| Add: Increase in ……………. | ||||||
| Add: Increase in ……………. | ||||||
| Add: Increase in ……………. | ||||||
| Add: Increase in ……………….. | ||||||
| Net Cash Flow from Operating Activities | 149 | |||||
| Cash Flow from Investing Activities: | ||||||
| Decrease (Increase) in ……….. | ||||||
| Decrease (Increase) in other non-current asset | -7 | |||||
| Net Cash Flow from Investing Activities | ||||||
| Cash Flow from Financing Activities: | ||||||
| Increase in ……………. | ||||||
| Net Cash Flow from Financing Activities | ||||||
| Net increase (decrease) in cash | ||||||
| Cash and Cash Equivalent, Balance as at 31 December 2023 | 1427 | |||||
| Cash and Cash Equivalent, Balance as at 31 December 2024 | ||||||
- Calculate and Analyse the performance of Dreamdove PLC using the following financial ratios.
| Profitability Ratios |
| Gross Profit Margin |
| Operating Profit Margin |
| Net Profit Margin |
| Liquidity Ratios |
| Current Ratio |
| Quick Ratio |
| Efficiency Ratios |
| Inventory Days |
| Receivable Days |
| Payable Days |
| Cash Conversion Cycle |
| Sales Revenue to Capital Employed |
| Financial Gearing (Leverage Ratios) |
| Debt to Equity Ratio |
| Investment Ratios |
| Earnings per Share |
Use 2 decimal points for numbers/percentage and 0 decimal points for days (rounding up). You are expected to present the working notes as well.
- The recent valuation during due-diligence process by independent consultants found that Non-current Assets of Dreamdove PLC should be 20% above the written-down value as at 31 December 2024, and its Current Assets should be 30% above the written-down value as at 31 December 2024. Using Asset- based Valuation, calculate the Total Value of Dreamdove PLC and its value per share. Use 2 decimal points in your valuation.
- As the three basic valuation methods – Asset-based Valuation, Earnings-based Valuation and Dividend Valuation Model would present different results, the Top Management would like you to present a critical analysis what the appropriate scenario is for each valuation method (i.e. what is the appropriate situation to use each method).
Task III:
Business expansion has always been a key focus of FA Monsoo management. The operations team has identified several potential sites and the company has been considering proposals from different equipment suppliers. To make those sites operational, this requires significant investment.
The following two proposals which are almost identical, have taken management interest: