Finance

Section 1

a)
Brightview may increase the efficiency and effectiveness of the management of its stocks by examining the link between its stocks in the companys supply chain operations and activities. As the stock usually sucks up the cash available to a firm while having the stock waiting to get sold, the companies always try to keep stock in hand for the shortest possible time.

Stock management is vital for a company because it costs the company to maintain its stocks. These costs may include carrying costs of stocks, opportunity costs and risk of wastage, loss or obsolescence.
Like every business, Brightview must strive to achieve an optimum level for its stock in hand as poor management of stocks may lead to disappointment to customers, increased carrying costs for the company, blocking of cash and outdated stocks.

The company therefore must use a relevant stock management method such as
Just in time
Fixed re-order stock level
Fixed time re-ordering
Economic order quantity
For an effective and efficient management of stocks it is vital for Brightview plc to know the sale cycle of its products, which is based on knowing the time between when a finished product arrives in to the market until they are sold to customers.

Section 1
b)
The sources of finance available to Brightview plc may include obtaining funds from

Capital market
Loan stock
Bank borrowing
Factoring

CAPITAL MARKET

Issuing shares in capital market is one of the most common and important source of obtaining long term finance by a company. Holders of such shares are termed as the real owners of a company. Ordinary shares are the best source of raising finance, as they are only required to be paid back if the company is wound up.

Advantages
Common with the managers of the company investors have a vested interest a companys success.
Future cash flows are not committed (as payment of dividend is on the discretion of the directors)
No charge on the companys fixed assets.

Disadvantages
Earnings  ownership dilution.
Share holders participate in the profits of the company.
Floatation costs for equity are higher as compared to flotation costs for debt.

LOAN STOCK
It is legally termed as an interest attached debt instrument issued by a company under its common seal to acknowledge the loan taken by the company. Holders of such instruments are called long-term creditors of the company.

Advantages
Costs cheaper than bank borrowing as cost of debt for a company is lower than the cost of equity.
It offers the company tax benefits as the interest expense is tax allowable expense.
Holders of loan stock do not play role in the management and control of the company.
Preferred mode of investment for risk-averse investors as they offer a better return than government bonds or banks.

Disadvantages
Return has to be paid in fixed or determinable amounts of money, therefore regarded as a fixed cost to the company.

Interest has to be paid even if the company is not making profits, hence endangering the existence of the company.

Loss of credit worthiness.

BANK BORROWING

Bank borrowing has always been an important source of finance to companies. Short term bank borrowing may be in the form of
Overdraft
Short-term loan

Advantages
Interest expense is normally tax allowable.
Loans are mostly offered in reliable and secure amounts of money, that is there is a fixed duration for which funds can be utilized..

Disadvantages
Creates a charge over the assets of the company.
Fixed payments.
Impacts the credit worthiness of a company.

FACTOR FINANCE

Its an arrangement between a company and a factor agent under which the factor agent collects debts on behalf of the company. However the factor agent advances to the company apportion of the money it is due to collect from the debts.

Advantages
Allows the business to realize cash from its sales in time to pay its suppliers on a timely basis thus allowing the company to take advantage of any early payment discounts.
Allows the company to maintain optimum stock levels, as a direct result of having sufficient cash available to it.
Growth can be achieved through making sales rather than through injecting fresh capital.

Disadvantages
With debtors making payments direct to the factor, it creates a negative picture of the companys attitude.
It can also raise questions on firms financial stability as collecting debts through a factor indicates that a company is in need of rapid cash.

Section 2
a)

The cost of capital for a company is the return that a company would seek to earn from the investments undertaken by it. The company needs this minimum return to satisfy the return required by the investors of the company (i.e. debt and equity providers)

Therefore, a company will only undertake projects from which it can earn a return that is either equal or higher than its weighted average cost of capital provided that the company uses its existing capital structure.
The initial weighted average cost of capital is the sum of weighted costs (post tax for debt, pre tax for common equity) of debt and common equity.

The weighted average cost of capital (Ka) can be calculated as follows
Ka  We x Ke  Wd x Kd (1-t)
Where,
WeWeight of common stock in the firms capital structure.(0.71KeShare holders required rate of return.(6WdWeight of debt in the firms capital structure.(0.29KdDebt (Debenture) holders required rate of return.(5

Substituting the above values in the formula we can calculate the weighted average cost of capital for Brightview plc.

Cost
(after tax)WeightsWeighted CostDebt ...Kd50.291.45Common equity (shares) ..Ke60.714.26Weighted average cost of capital ..Ka SUM(ABOVE) 5.71Note The above calculation has been done ignoring taxes if any)

Section 2

b)
The total value of the debentures at the revised market interest rate can be calculated using the formula,
MVDRiWhere,
MVDTotal market value of Debentures(12,000,000RTotal payments associated with the debentures.(Not giveniInterest rate(5Substituting the above values given above in the formula we can calculate the total payments associated with the debentures as follow
12,000,000R5
R600,000Now we can use R, as calculated above to determine the revised Market value of Brightviews debentures, with the changed interest rate.
MVD600,0004MVD15,000,000

Reason for change in the market value of the debentures
When there is a slump in the economic activity the market interest rates are more likely to decrease as a direct result the market value of a bond or an equity instrument would increase. This is because of reduction in loss of purchasing power, resulting in a reduction in the risk associated with owing an instrument.
This would be because the company would have to pay less for its sources of finance which will result in savings for the company in terms of interest payments eventually resulting in increased earnings (cash flows).
As among of many methods of valuing a company one is to take the sum of discounted values of all future cash flows the company expects to generate from its business activities.

SECTION 2

c)
i) Cash flow forecast for Brightview plc. (As originally stated)

Jan
(,000)Feb
(,000)March
(,000)April
(,000)May
(,000)June
(,000)RECEIPTSSales1,2501,6501,8601,9802,2502,450PAYMENTSWages and salaries8508508501,4601,4601,460Supplies4507509701,0701,2401,890Rent and rates808080808080Advertising505050505050Miscellaneous101010151515TOTAL SUM(ABOVE) 1,440 SUM(ABOVE) 1,740 SUM(ABOVE) 1,960 SUM(ABOVE) 2,675 SUM(ABOVE) 2,845 SUM(ABOVE) 3,495Receipts minus payments(190)(90)(100)(695)(595)(1,045)Balance brought forward750560470370(325)(920)Balance carried forward560470370(325)(920)(1,965) ii) Cash flow forecast for Brightview plc. (Recalculated)

Jan
(,000)Feb
(,000)March
(,000)April
(,000)May
(,000)June
(,000)RECEIPTSSales1,2501,6501,8601,9802,2502,450PAYMENTSWages and salaries8508508501,4601,4601,460Supplies4509001,1641,2841,4882,268Rent and rates808080100100100Advertising505050505050Miscellaneous101010303030TOTAL SUM(ABOVE) 1,440 SUM(ABOVE) 1,890 SUM(ABOVE) 2,154 SUM(ABOVE) 2,924 SUM(ABOVE) 3,128 SUM(ABOVE) 3,908Receipts minus payments(190)(240)(294)(944)(1,822)(1,458)Balance brought forward75056032026(918)(2740)Balance carried forward56032026(918)(2740)(4,198)
(it has been assumed that the increase in the supplies, rent and rates and miscellaneous costs occur as in addition to the actual cost for that yeah and not over the total cost for the previous year)

iii) Main trends and messages reflected by the cash flow statement presented above.

The recalculated cash flow statement reflects that the companys financial position will be at risk if the company fails to take immediate steps for covering its costs with the associated revenues. It is critical for the company to revisit it pricing policies and marketing strategies because it will help increase the sales revenue for the company on the other hand company needs to take steps to control its costs.

Section 3
a)
ii) Payback method

YearOutflow  Inflow
 000Cumulative
Cash flow
 0000(10,000)18,250(2,700)(4,450)213,410(5,710)3,250314,980(6,280)418,590(7,890)517,850(8,230)
Project payback time is be estimated to be equal to 1.57 years or 1 year and 7 months

iii) Accounting Rate of Return (ARR)

YearEBITDA
 000Deprecation
 000Net Profit
 00015,5502,0003,55027,7002,0005,70038,7002,0006,700410,7002,0008,70059,6202,0007,620 SUM(ABOVE) 32,270
 000Average annual profit6,454Average investment  (initial investment  residual value)25,000Accounting rate of returnAverage annual profit1.29Average investment

iii) Net Present Value (NPV)

YearCapital
 000Net cash flow
 000Discount factor  5Present value
 0000-10,000-1.000-10,00015,5000.9525,23627,7000.9076,98438,7000.8647,517410,7000.8238,80659,6200.7847,542Net present value SUM(ABOVE) 26,085
a)

A) PAYBACK
Payback method calculates the time period required for a firm to recoup its initial investment in a project in other words, it is the period of time taken by a firm to equate total inflows associated from a project to the projects outflows.

It is commonly used as a first screening method when a firm is deciding to invest in a capital investment. The payback for a particular project is compared with the companys targeted payback.

Strengths
Simple to understand and easy to compute.
Identifies risk to some extent by separating long and short-term projects.

Weaknesses
Doesnt take account of the time value of money
Ignores the future profitability of projects after initial investment has been recouped (after breakeven point).
Fails to distinguish between projects having similar payback period
May cause the company to invest in projects that have a negative NPV.


B) ACCOUNTING RATE OF RETURN
This method calculates the minimum rate of return an investment should yield if it has to be accepted by a firm. If this rate computed exceeds the target rate of return for a company its only then that an investment is undertaken.

Strengths
Simple to calculate as it uses accounting data.
It considers the total life of a project.

Weaknesses
It is based on accounting profits (accounting profits include accruals and other non cash items)
It ignores the time value of money.

C) NET PRESENT VALUE

The method discounts the future cash inflows that a company expects to earn from an investment  project and is then compared with the present value of all the cash outflows (initial and subsequent).The discounting is done using the cost of capital for the company as it is the minimum return the company must generate to pay its finance providers.

Strengths
Uses cash flows from a project not merely accounting profits.
They account for the concept of time value of money.
They take in to account all the related cash flows from a project.
It adjusts for the timing of cash flows.
Account for the risk differences in different projects  investments.

Weaknesses
They are based on future cash flows which are usually difficult to forecast.
The fail to provide a conclusive decision when the capital available for the projects is rationed.
The discount rate (cost of capital) used to discount cash flows is difficult to estimate.
The cost of capital tends to change over the life of a particular project  investment.

b)
Factors that should be taken in to account by a firm like Brightview plc while setting its prices, may include
Internal factors
Marketing objectives of the company for that particular product.
Marketing mix strategies
Consideration of costs
Organizational considerations
External factors
Nature of the products market and demand for the product.
Competitors financial strategies (price, costs etc.).
Other environmental factors (economic, social and government considerations)

 Section 4
a)
Brightview Plc
Balance Sheet
As at December 31, 2010

Note20102009 000 000EQUITY AND LIABILITIESAuthorized10,000,000 ordinary shares of  100 eachIssued, subscribed and paid up capitalReservesSurplus on revaluation of fixed assetsLIABILITIESNon-current liabilitiesLong term financingDebenturesDeferred liabilitiesCurrent liabilitiesTrade and other payablesInterest, profit, return or mark-up accruedShort term borrowingsCurrent portion of long term borrowingsProvision for taxationContingencies and commitmentsTotal equity and liabilitiesBrightview Plc
Balance Sheet
As at December 31, 2010

Note20102009 000 000ASSETSNon-current assetsProperty, plant and equipmentIntangiblesLong term investmentsCurrent assetsStores, spares and loose toolsStock in tradeTrade debtsLoans and advancesTrade deposits and short term prepaymentsAccrued interest  mark upOther receivablesCash and bank balancesTotal assets Brightview Plc
Profit and loss account
For the year ended December 31, 2010

Note20102009 000 000Turnover  netCostGROSS PROFITDistribution costsAdministrative expensesOther operating expensesFinance costOther incomePROFIT BEFORE TAXATIONTaxationPROFIT AFTER TAXATION
Distinctive elements in

a) Balance Sheet
The balance of Bright view plc would differ from another form of organization such as banks in the following ways

Assets For a bank assets would primarily consist of loan and advances given to different parties (other than banks fixed assets) however, in the case of Brightview plc they would be their own fixed assets and long-term investments etc.

Liabilities For a bank the most distinguishable liability would be deposits and other amounts that customers has kept with the bank however, for Brightview plc they would consist of Loans and borrowing from banks.

b) Profit and loss account
For a company like Brightview plc the profit and loss would consist of a trading account summarizing amounts from sale of goods produced and other operating income and expenses most of which would relate to the companys operating activities, for a bank the trading profit and loss account would primarily consist of income earned from the loans and advances given to other parties and interest expense paid to its depositors.

b)
Purpose of a profit and loss account
A profit and loss account is used to summarize the trading transactions (sales, purchases, income and expenditure) of a business and the resulting profit or loss for a given period.

It summarizes the business results for a company by stating whether the company has made profit or loss over its financial year. Further it also describes how profit or loss has arose i.e. by categorizing and comparing different classes or revenues and costs

Purpose of a balance sheet
The balance sheet of a plc provides a snapshot of the financial position of a company at a given point in time, usually at the end of an accounting period. Unlike profit and loss account it does not show the effect of day to day transactions or the current profitability of a business.

It also reflects the year-end balances of all the assets and liabilities of the company in addition to its shareholders equity.

c)
Ratios can assist in assessing the profitability and liquidity of firm through cross sectional analysis (comparison with industry) and Time series analysis (comparison with previous years).

Gross profit and Net Profit ratios of a firm when compared with the other firms in same industry may help to analyze differences in the management of sales and cost control provided they both sell same number of finished goods. Further, it can help in assessing a firms performance as compared with the previous years in economy of rising prices.

Current ratio of a firm when compared with other firms in the same industry indicates if the firm has invested excess amount of money in its current assets which otherwise can be utilized in maximizing sales.
Quick Ratio of a firm when compared with other firms in the industry might indicate excessive or too little investment in the stocks which might indicate to the management the need for establishing stock management systems.

d)
If the project set out in section 3 is undertaken it would positively affect the profit of the company and would also increase in the market value of its financers (equity and debt). This would help increase the total earnings and would also increase the asset base.