Finance-QA488

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Strategic Financial Management
 
a) You work for a large financial advisory firm. One of your client companies is Caltech International plc, a strategic logistics facilitator, which is listed on the London stock exchange. The company has 1.3 billion shares in issue, (1,300,000,000), with a current market price of 524p per share.
The company’s 2017 financial position statement indicates net assets, (non-current assets plus net current assets), of £5.3 billion, (which includes £2 billion of non-quoted investments), and the company has issued £4 billion of long-term debt.
 
Caltech’s 2017 sales revenues were £8.85 billion, (i.e. £8,850,000,000), and operating profits were £1.77 billion. Sales have been growing at an average annual rate of 7% and are expected to continue to do so until the end of 2022, which is the company’s planning horizon. To support this level of growth, the company sets its annual capital expenditure budget equal to 35% on annual incremental sales. Additional investment in net current assets is also required at a level equal to 12% of incremental sales. The company currently pays tax on profits at a rate of 22%. However, this is expected to rise by 1% per year, up until the end of the company’s planning horizon. 2
 
Traditionally Caltech International has been faced with a situation where it has constrained investment resources – because of capital expenditure budget limits – that have held back its ability to undertake all of the capital investment opportunities that it would like to undertake. In such circumstances, the company has evaluated all capital investments projects on the basis of an internal rate of return analysis, ranking all investment decisions on this basis. Investments are therefore undertaken in order of declining IRR, until all budgeted capital investment funds have been utilised.

 
This has resulted in some investments being rejected even though their IRR has significantly exceeded the company’s required rate of return of 18%, (which is it weighted average cost of capital).
Caltech International has recently appointed a new chief financial officer, who is unhappy about this situation. She recognizes the need for annual constraints on the amount of the company’s capital investment spend, but is unsure as to whether or not the company is making the correct capital investment decisions using its existing procedures. The CFO has approached your financial advisory firm for advice on this matter.

 

Required
 
Prepare a report for the CFO of Caltech International on
 

Part 1) The capital investment appraisal decision-making challenges presented by a situation of capital rationing;
 

Part 2) A critical evaluation the company’s current capital investment decision making strategy
 

Part 3) Advice on how the company’s capital rationing decision-making might be improved upon in the future including, amongst other things, a discussion about the concept of capital rationing; the distinction between ‘hard’ and ‘soft’ capital rationing; and the distinction between single and multi-period capital rationing.
 
b) Caltech International’s financial objective is set in terms of increasing shareholder value and the company’s financial performance, in terms of meeting this financial objective, is evaluated on the basis of three key performance indicators, (KPIs): year-by-year growth in sales revenues; year-by-year growth in operating profit and year-by-year growth in dividends.
 
The CFO is concerned that the three KPIs do not link directly to the concept of shareholder value and feels that the company’s financial performance would be better measured either through the use of shareholder value analysis, (SVA), or maybe the use of economic profit.
 
After completing the study of this topic you should be able to
 
1. discuss the alternative and conflicting views concerning the financial objectives of a business
 

2. identify the objectives of the various business stakeholders, the conflicts that can arise as a result of differences between them and how they may be resolved through both regulation and management incentive schemes
 

3. demonstrate that you understand the need for the business to have an ethical framework within which to construct objectives and strategies and resolve stakeholder conflicts
 

4. explain the function of the major international financial institutions and markets and how they interact and impinge on a business
 

5. assess how environmental and social issues, such as environmental sustainability, carbon footprint and race/gender equality, impact on a company’s objectives and governance
 

6. describe how psychological issues relating to both management actions and investor behaviour can have an effect on our view of corporate finance.
 
The Essential readings for this topic are
 
During this topic, we will consider
 
You can read more about our case study assignment help services here.
 

 

• different approaches to evaluating a company’s financial performance from traditional financial statements
 
• the issues surrounding how a business might deliver value to its shareholders through the dividend decision
 
• what influences the dividend decision
 
• how a company might select a dividend policy to implement
 
• the impact of agency on the dividend decision.
 
Given that many of you will have already completed ACCA paper F9, the content of
this topic consists largely of a review and extension of your existing knowledge. In
Topic 4 we will
 

• conduct an in-depth review of the investment appraisal techniques of net present value (NPV) and internal rate of return (IRR), with the conclusion that although NPV might be technically superior, IRR has many presentation advantages
 

• bridge the gap between the two contrasting elements of this conclusion by introducing and evaluating the concept of a modified IRR (MIRR) analysis
 

• analyse key practical investment decision situations including optimal replacement decisions and ‘make or buy’ decisions.
 

After completing the study of this topic you should be able to:
1. critically review discounted cash flow analysis and the application of the modified IRR compromise
 

2. describe complex real-world investment decision situations involving replacement decisions and make or buy decisions.
 
Required: 3
 
Prepare a report for the CFO that discusses Caltech International’s current financial objective and whether or not the company’s three KPIs that are currently used to measure the degree to which the financial objective is achieved, are appropriate
 
c) Calculate the company’s current SVA.
d) Calculate the company’s 2017 economic profit.
e) Critically contrast these two measures of evaluating shareholder value.
 

• The maximum word limit for this coursework assignment is 3,000 words (excluding the list of references).
• You may use less than 3,000 words but in so doing you may be penalizing yourself as it is likely to be challenging to respond to the coursework brief.
 
• You MUST state an accurate word count (excluding the list of references) at the end of your work. If you do not state an accurate word count your mark will be reduced by 5 marks.
• The content within the main body of text comprises the overall word count, including in-text citations, references, quotes, heading and sub-headings. The cover page, reference list and any appendices do not count towards the overall word count.
 
• If you submit more than 3,000 words the following penalties apply
a. up to 10% more than 3,000 words – your mark will be reduced by 5 marks;
b. for more than 10% than 3,000 words you will receive zero marks for this work.
 

Product code: Finance-QA488
 
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