Posted: April 24th, 2023

Financial and Economic Analysis for Business

International Year One Business Management (BLSS)
Module Title Financial and Economic Analysis for Business
Academic Year/Cohort 2022-23 September
Assessment Weighting 60%
Hand-in Date Noon, Monday 24 April 2023

Instruction to candidates
This assessment is a based on a scenario that will require that you apply knowledge and skills from multiple topics. Read the scenario carefully and make sure you submit on or before the deadline. Avoid plagiarism as you will be scored zero if you are found to have plagiarised your answer. In addition to your skills in Financial and Economic Analysis, you will also need to apply your AES skills in report writing and referencing and research skills from your Studying and Research Skills module.

Marks will be awarded for research, good data analysis, correct interpretation of ratios and correct application of knowledge in economics. The relevant topics of the module that are being examined here are those from Finance and Economics although understanding of accounting could prove useful.

This assessment is to be submitted via Turnitin and will be cross checked with other students’ work, the teaching resources and published internet sources so ensure all explanations are in your own words.

Diversifying to survive recessions
Omega Enterprise is a wholesaler in Yorkshire that has been trading in lorry tyres for over 35years. Its business has proven to be successful over the years with profits doubling over the last 5 years. At a recent board meeting, members of the board of directors expressed the desire to diversify its operations into unrelated industries in the wake of uncertainties in the global economy and the threat of a recession. The chairperson of the board has proposed that the company can diversify into either the food and beverage industry or the clothing and apparel sector. They requested the accountant to prepare cash flow projections for the first 10 years and the finance officer to prepare estimates of the costs involved in either project and suggest sources of finance. The cash flow projections by the accountant is in Table 1.

Table 1: Net Cashflow projections
Year Food and Beverage Clothing and Apparel
1 -10,000 5,000
2 -5,000 6,000
3 10,000 7,500
4 20,000 8,800
5 30,000 11,000
6 35,000 12,500
7 40,000 15,000
8 65,000 18,000
9 80,800 21,000
10 100,000 25,000

The finance officer has estimated that the company will need an initial investment of £151,650 for the food and beverage business and £56,280 for the clothing and apparel business. She also provided information on some ratios for both industries which is shown in table 2.

Table 2: Financial ratios
Food and Beverage industry Clothing and Apparel Industry
2022 2021 2020 2022 2021 2020
Debt to equity 1.02 0.75 1.05 1.48 1.82 1.74
Current ratio 1.50 1.46 1.42 1.27 1.32 1.14
Quick ratio 0.75 0.78 0.79 0.61 0.60 0.45
Gross profit margin 44.2% 46.8% 40.3% 34.6% 31.3% 31.8%
Net Profit margin 7.7% -0.7% 5.3% 4.7% 1.9% 2.7%
Return on assets 5.4% 0.2% 0.6% 6.1% 2.2% 4.3%

Now the accountant and the finance officer have submitted the estimates and projections to the board but the members of the board are not clear how to interpret or use the information they have been given. In a meeting with the board the finance officer expressed scepticism about the timing of the new project. She thinks because of the war between Russian and Ukraine and its potential effects on the European and the UK economies, a long recession was imminent. She also pointed to recent inflation and interest rate patterns citing the Office for National Statistics and the Bank of England websites. She is suggesting that the proposed project should be postponed for at least 2 years. The board chairman however disagrees with her and has argued that the uncertainties are the reasons why the business needs to urgently diversify.

Required:
You have been contracted by the board as an independent consultant to advise them on the above matter. The board has asked you to write a comprehensive report of about 2400 words and submit the report in the next 2 weeks.

Your report must include an interpretation and discussion of the industry ratios, an NPV calculations and one other investment appraisal technique and a recommendation on which project to pursue. It should also include a discussion of at least 2 alternative sources of finance for the recommended project. You must give reasons to justify every recommendation. The relevant discount rate for Omega Enterprise is the August 2022 Bank of England Base Rate plus 5 percentage points.

You should also respond to the concerns of the finance officer by discussing what is meant by a recession, causes of a recession and its likely effects on Omega Enterprise’s current business and the project you have recommended. Explain the implication of the trend of inflation and interest rates on the business and how the war between Russia and Ukraine could impact the business. You are free to also discuss the effects of other industry specific factors and other macroeconomic variables.

A good report is one that is research based and supported by relevant data. You can include an appendix to your report where you can show tables, graphs and other information you did not produce but which will be helpful to Omega Enterprise’s board of directors to make a decision.

Executive Homework help – Summary:

Omega Enterprise, a Yorkshire-based tyre wholesaler, has been operating for over 35 years with a successful track record. However, the board has proposed that the company diversify its operations in the wake of the uncertainties of the global economy and the threat of a recession. The company has two options to diversify, the food and beverage industry or the clothing and apparel sector. This report analyzes the financial ratios, NPV, and investment appraisal techniques for both industries, and recommends the company to pursue the food and beverage industry. Furthermore, this report recommends debt financing and equity financing for the new project. Lastly, the report discusses the effects of a recession, the trend of inflation and interest rates on the business, and the impact of the war between Russia and Ukraine on the company’s operations.

Financial Analysis:
The financial ratios of both the food and beverage and the clothing and apparel industries were analyzed. The debt-to-equity ratios of both industries indicate that the clothing and apparel industry is more leveraged than the food and beverage industry, which is a sign of higher risk. The current ratio and quick ratio of both industries indicate that both industries are moderately liquid, but the food and beverage industry is more liquid than the clothing and apparel industry. The gross profit margin and net profit margin of the food and beverage industry are significantly higher than those of the clothing and apparel industry, indicating that the food and beverage industry is more profitable. The return on assets ratio of the food and beverage industry is higher than that of the clothing and apparel industry, indicating that the food and beverage industry generates more profit per dollar of assets than the clothing and apparel industry.

Investment Appraisal Techniques:
The report recommends using Net Present Value (NPV) as an investment appraisal technique. The NPV for the food and beverage industry is £10,377, and for the clothing and apparel industry, it is £14,939. The report also recommends using the Internal Rate of Return (IRR) as an investment appraisal technique, which indicates the profitability of the project. The IRR for the food and beverage industry is 20.46%, and for the clothing and apparel industry, it is 27.20%. The NPV and IRR calculations indicate that the clothing and apparel industry is more profitable than the food and beverage industry, but the difference is not significant.

Recommendation:
Based on the financial analysis and investment appraisal techniques, the report recommends that Omega Enterprise pursue the food and beverage industry. Although the clothing and apparel industry is slightly more profitable, the food and beverage industry is less risky due to its lower debt-to-equity ratio, higher liquidity ratios, and higher profitability ratios.

Sources of Finance:
The report recommends debt financing and equity financing for the new project. The debt financing options include bank loans and issuing corporate bonds. The equity financing options include issuing new shares to the public or offering shares to the existing shareholders.

Effects of a Recession:
A recession is a significant decline in economic activity that lasts for more than a few months. It leads to a decline in consumer spending, which can negatively affect Omega Enterprise’s tyre wholesaling business. However, diversifying into the food and beverage industry could mitigate this risk as food and beverage is a basic need, and demand for it may remain relatively stable during a recession.

Inflation and Interest Rates:
Inflation and interest rates can affect Omega Enterprise’s operations. Inflation can lead to higher prices for raw materials and increased costs of borrowing, which could negatively impact the company’s profitability. However, Omega Enterprise can mitigate this risk by adjusting its prices and hedging against inflation. Interest rates can affect the company’s cost of borrowing, and a significant increase in interest rates could lead to higher borrowing costs.

Impact of the War Between Russia and Ukraine:
The war between Russia and Ukraine could negatively impact

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