Financial Management

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Where appropriate, work must be referenced using the Harvard system.

Important Information:

The following is a summary of the main requirements for submitting your 24 hour
assessment. Further information is available on the ilearn resources for the unit.

1. Your Turnitin submission document must be a Microsoft Word (or compatible)

document which has the facility to embed a financial spreadsheet.
2. Computational aspects of questions must be solved using a Microsoft Excel (or
compatible) spreadsheet, extracts of which will be embedded into the Turnitin
submission document. Separate instructions and suggestions are available below.
3. The spreadsheet must be formulated as a spreadsheet and not simply used to type in
your answers.
4. Written answers to questions must be incorporated within the main word document
not as part of an embedded spreadsheet.
5. Marks will not be awarded for written answers incorporated within financial
spreadsheets or within other ‘objects’.
6. The submission Word document must be uploaded to Turnitin using the ‘submit your
assignment’ facility which you will find on the ilearn resources for the unit.
7. The submission Word document must be uploaded via Turnitin within the 24 hour
assessment period. It is up to you to ensure that there is sufficient time to facilitate
this. Experience has shown that the system slows down as the deadline for submission
approaches. Late submissions will not be accepted.
8. If you are not able to demonstrate the use of financial spreadsheets you will lose some
marks.

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Each question within the paper will be marked separately but for your guidance the
markers will use the following criteria.

Below Your work will contain serious flaws, which show that you have not understood key
30% principles.
30-39% Although you will have shown some awareness of the key issues you will not have
demonstrated a sufficient understanding or application to justify a pass mark.
There are significant errors in your calculations and you have not shown an
understanding of relevant theory or applied it adequately.
40-49% You will have shown a basic understanding of the theoretical issues. You will have
demonstrated an understanding of the key issues in the question and made some
attempt to apply theory to them to reach a conclusion. Your calculations will
contain some errors or omissions but fundamentally you will have demonstrated
an understanding of the underlying principles.
50-59% You will have shown a good understanding of the key principles and been able to
apply these to the problems set. You will have provided a conclusion and
recommendations where required which is soundly based. Your calculations will
contain some errors or omissions but these will be relatively minor.
60-69% You will have demonstrated that you have a critical understanding of the key
principles. You will have provided reasoned conclusions, which are likely to
include different options. Any computational errors will be minor.
70% and Your explanation of key principles will draw on a wide range of sources and
above indicate a critical understanding. Your conclusions will be soundly based and will
include different options. Any computational errors will be minor.

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Question 1

The following are the financial statements for British Airways for the financial years ending
2006 through to 2009.

See following pages:

BritishAirwaysGroupBalanceSheet
Asat31stMarch
2009 2008 2007 2006
£Million Restated Restated
Non-currentassets
Property, plant and equipment:
Fleet 5,996 5,976 6,153 6,606
Property 971 977 932 974
Equipment 266 310 272 302
7,233 7,263 7,357 7,882
Intangibles:
Goodwill 40 40 40 72
Landingrights 205 159 139 115
Software 22 22 33 46
267 221 212 233
Other investments 0 0 107 33
Investmentsinassociates 209 227 125 131
Available-for-sale andother financial assets 65 80 36 92
Employee benefit assets 340 320 116 137
Derivative financial instruments 3 51 0 0
Prepaymentsandaccruedincome 25 19 0 0
Total non-currentassets 8,142 8,181 7,953 8,508
Currentassetsandreceivables
Inventories 127 112 76 83
Trade receivables 530 586 654 685
Other current assets 268 308 346 458
Derivative financial instruments 40 241 0 0
Other current interest-bearingdeposits 979 1,181 1,642 2,042
Cashandcash equivalents 402 683 713 398
1,381 1,864 2,355 2,440
Total currentassetsandreceivables 2,346 3,111 3,431 3,666
Total assets 10,488 11,292 11,384 12,174

See over for second half of the Group Balance Sheet

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Shareholders' equity
Issuedshare capital 288 288 288 283
Share premium 937 937 933 888
Investment inownshares -9 -10 -10 0
Other reserves 430 1,847 1,000 690
Total shareholders' equity 1,646 3,062 2,211 1,861
Minorityinterest 200 200 200 213
Total equity 1,846 3,262 2,411 2,074
Non-currentliabilities
Interest-bearinglong-termloans 3,074 2,751 2,929 3,602
Employee benefit obligations 191 330 1,142 1,803
Provisionsfor deferredtax 652 1,075 930 896
Other provisions 256 210 153 135
Derivative financial instruments 123 4 0 0
Other long-termliabilities 204 168 194 232
Total non-currentliabilities 4,500 4,538 5,348 6,668
Currentliabilities
Current portion of long-termborrowings 689 423 417 479
Trade andother payables 2,796 2,875 2,744 2,822
Derivative financial instruments 471 20 0 0
Current taxpayable 4 4 54 75
Short termprovisions 182 170 410 56
Total currentliabilities 4,142 3,492 3,625 3,432
Total equityandliabilities 10,488 11,292 11,384 12,174

See over for the Consolidated Profit and Loss Account

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BritishAirwaysGroupConsolidatedIncomeStatement
Fortheyearended31stMarch
2009 2008 2007 2006
£Million Restated Restated
TrafficRevenue
Passenger 7,836 7,600 7,263 6,924
Cargo 673 615 618 638
8,509 8,215 7,881 7,562
Other revenue 483 543 611 651
Revenue 8,992 8,758 8,492 8,213
Employee costs(excludingrestructuring) 2,193 2,165 2,277 2,260
Restructuring 78 1 0 0
Depreciation, amortisationandimpairment 694 692 714 715
Aircraft operatinglease costs 73 68 81 90
Fuel andoil costs 2,969 2,055 1,931 1,581
Engineeringandother aircraft costs 510 451 414 441
Landingfeesand enroute charges 603 528 517 520
Handlingcharges, cateringandother operatingcosts 1,021 977 930 915
Sellingcosts 369 361 436 438
Currencydifferences 117 6 18 -19
Accommodation, ground equipment and ITcosts 585 576 618 578
Total expenditureonoperations 9,212 7,880 7,936 7,519
Operating(loss)/ profitbeforenon-recurringitems -220 878 556 694
Credit arisingonchangesto pensionschemes 0 0 396 0
Provision for settlement of competitioninvestigations 0 0 -350 0
Operating(loss)/ profit -220 878 602 694
Fuel derivative (losses) / gains -18 12 -12 19
Finance costs -182 -175 -168 -214
Finance income 95 111 129 92
Net financing(expense) / income relatingto pensions -17 70 -19 -18
Retranslationchargesoncurrencyborrowings -59 -11 13 -12
Profit onsale of property, plant andequipment and
investments 8 14 47 27
Share of post-taxprofitsin associatesaccountedofr using
the equitymethod 4 26 5 28
Net charge relatingto available-for-sale financial assets -12 -3 14 0
(Loss)/ profitbeforetax -401 922 611 616
Tax 43 -194 -173 -152
(Loss)/ profitaftertaxfromcontinuingoperations -358 728 438 464
Lossfromdiscountinued operations(after tax) 0 -2 -134 3
(Loss)/ profitaftertax -358 726 304 467

Weightedaveragenumberof sharesforEPS('000) 1,151,230 1,150,537 1,141,133 1,116,178

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Requirements

a) Using the four years worth of financial statements above, you are required to calculate a
series of appropriate ratios relating to liquidity, profitability, efficiency and investment. (12
marks)

b) Analyse the ratios you calculated above, and give an interpretation of the company’s
performance over the last four years in terms of liquidity, profitability, efficiency and
investment. (16 marks)

c) Identify each of the stakeholders who may be associated with British Airways, and
comment on how each perceive British Airways to be performing using both the ratio
analysis above and also any additional publicly available information regarding British
Airways, their competitors, the industry or the economy. (7 marks)

(35 marks in total)

Learning Outcomes 1, 2, 5, 6 and 7

Question 2

Didcot plc is considering 2 potential new investments to enhance its manufacturing plant.
These are mutually exclusive options in that the acceptance of any one investment would
prevent investment in the other.

The organisation uses a net present value (NPV) approach to such decisions and uses its
weighted average cost of capital (WACC) as the discount factor within the model.

Currently Didcot plc has 300,000 x £1 Ordinary shares and £200,000 of debt. The Ordinary
Shareholders expect a yield of 17% and the after-tax cost of debt is 12%.

Details of the two investments in the plant enhancement are as follows:

Investment A has an immediate cash outflow of £50,000 and this would be followed by cash
inflows of £20,000 at the end of year 1 and 2, £15,000 at the end of year 3 and 4.

Investment B requires no immediate cash outflow, but £5,000 per annum would be paid at the
end of years 1, 2, 3 and 4. Cash inflows of £15,000 would also be received at the end of years
1, 2, 3 and 4.

Assume, for purposes of this case, that the annual cash inflows equate to taxable profits
before capital allowances

For investment A, the initial outflow of £50,000 attracts a first year taxation capital allowance of
35% based on the initial investment amount, followed by writing down allowances of 35% of
the tax written down value for years 2 and 3. As the investment will be disposed of at the end

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of year 4 with a nil residual value, the capital allowance to be claimed in year 4 will therefore
be a balancing allowance which will reduce the taxation written down value to zero.

[For example if the initial investment had been £100,000, then capital allowances to be claimed
would have been £35,000 in year 1, £22,750 for year 2, £14,788 for year 3 (tax written down
value at this point = £100,000 - £72,538 = £27,462) and a balancing allowance of £27,462.]

The capital allowance in respect of Investment A is available for offset against taxable profits in
each year.

For Investment B no capital allowances are available, but the annual outflows of £5,000 can
be set against the £15,000 inflows for taxation purposes, making the taxable profits £10,000
per annum.

Didcot plc pays corporation tax at the rate of 25% of its taxable profits after allowing for capital
allowances (where applicable). Assume that taxation in respect of year one profits is paid at
the end of year two.

[So, for example if a project has taxable profits (before capital allowances) of, say, £40,000 in
year 1 and if the company claims a capital allowance of £35,000, it would be charged
corporation tax of 25% x (£40,000 - £35,000) = £1,250 for that year. The £1,250 tax would be
paid in year 2.]

Requirements

a) Calculate the net present values of each of the proposed investments and recommend
which of the two, if any, should be selected. Give detailed reasons for your
recommendation. (35 marks in total)

Learning Outcomes 3, 4 and 5

Question 3

Drisdale Ltd have the following project to embark upon. They are keen to progress matters but
are anxious to know the viability of the project in terms of the profitability, or not, of the same.
The have the following budgeted information available:

The project would produce a single product known as the TY56X which it is anticipated would
sell for £300 per unit. The budgeted variable costs per unit would be £150 on direct labour, at
£50 per hour, and £100 on materials at £10 per kilogram. At the present time the annual fixed
costs of the business for this project are budgeted at £400,000, made up as follows:

£000
Salaries 200
Administration and marketing 140
Premises running costs 50
Vehicle and equipment maintenance costs 10

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Requirements

a) Calculate and report on the number of products that should be made and sold in order
to break even during the year (3 marks)
b) Calculate the value of sales required to break even (3 marks)

c) Calculate the estimated annual profit or loss assuming 8,500 products could be sold
during the year (4 marks), and

d) Critically analyse the advantages of undertaking break-even analysis and the key
criticisms of the technique (20 marks)

(30 marks in total)

Learning outcomes 3 and 5

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