FIN7007 Managing Strategic Finance and Risk Assignment Example

FIN7007 Managing Strategic Finance and Risk Assignment Example

FIN7007 Managing Strategic Finance and Risk Assignment Brief

Module: FIN7007 Managing Strategic Finance and Risk

Assessment Type: Time-Constrained Assessment (TCA)

Assignment Instructions Overview

This assessment is designed to test your ability to apply strategic finance and risk management concepts in practical scenarios. You will be required to interpret financial data, carry out calculations, and demonstrate critical thinking in areas such as working capital management, capital structure, investment appraisal, and corporate financing instruments. The assessment will consist of four compulsory questions, each covering different areas of the module content. It is expected that your work will be well-structured, evidence-based, and appropriately referenced using the AU Harvard referencing style.

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Understanding Assignment Objectives

The main objective of this assignment is to evaluate your understanding of how financial management supports strategic decision-making. By completing this assessment, you will demonstrate the ability to:

• Assess financial performance and efficiency using ratio analysis and working capital cycles.
• Apply models such as the Weighted Average Cost of Capital (WACC), Capital Asset Pricing Model (CAPM), and Net Present Value (NPV) to real-world decision-making.
• Critically analyse the implications of financing choices, risk management strategies, and corporate governance considerations.
• Evaluate investment projects, balancing profitability, risk, and long-term sustainability.
• Interpret the relevance of debt instruments and international financial markets in raising corporate finance.

The Student’s Role                       

Your role is to approach the assessment as a finance professional who must provide clear, well-reasoned, and accurate recommendations to decision-makers. This requires:

• Performing precise financial calculations using the information provided.
• Explaining the meaning and implications of results in a clear and professional manner.
• Balancing quantitative evidence with critical discussion.
• Demonstrating an awareness of strategic, ethical, and risk management considerations in financial decision-making.
• Presenting work that is academically rigorous, professionally expressed, and reflective of postgraduate-level standards.

Competencies Measured

This assignment is designed to measure the following competencies:

• Analytical Skills – The ability to interpret financial statements, calculate key ratios, and evaluate corporate performance.
• Technical Application – Using models such as WACC, CAPM, NPV, and bond valuation to solve financial problems.
• Strategic Thinking – Understanding how financing, risk, and investment choices affect long-term shareholder value.
• Critical Evaluation – Assessing alternative financial strategies, identifying risks, and challenging assumptions.
• Communication – Presenting findings in a structured, professional, and academically sound format.
• Ethical and Governance Awareness – Recognising how corporate governance, social responsibility, and ethical considerations impact financial management.

FIN7007 Managing Strategic Finance and Risk Assignment Example

Question 1: Capital Cycle of ANGLIA LTD

1. a) Working capital cycle (cash conversion cycle) at 31 March 2023

The primary financial objective of a company is to maximize shareholder wealth, commonly measured through market value of equity rather than accounting profits.

While profit maximization emphasizes short-term earnings, shareholder wealth maximization considers the time value of money, risk, and long-term sustainability (Brealey, Myers, & Allen, 2020). This aligns managerial decisions with shareholder interests.

You Can Also Check Other Related Assessments for the Executive MBA (Finance) Course:

FIN7006 Global Issues in Taxation Assignment Example

Formulas (day’s basis):

• Inventory Days = Inventory / Cost of Sales × 365
• Receivables Days = Trade Receivables / Credit Sales × 365
• Payables Days = Trade Payables / Cost of Sales × 365
• Working Capital Cycle (WCC) = Inventory Days + Receivables Days − Payables Days

Given 2023: Sales = $40m (all on credit); Cost of Sales = $26m; Inventory = $5.7m; Receivables = $6.575m; Payables = $2.137m.

• Inventory Days = (5.7/26)×365 = 80.0 days
• Receivables Days = (6.575/40)×365 = 60.0 days
• Payables Days = (2.137/26)×365 = 30.0 days

WCC (2023) = 80.0 + 60.0 − 30.0 = 110 days

Interpretation (positive vs negative):

A positive cycle (typical in manufacturing/wholesale) means cash is tied in inventory and receivables longer than supplier credit; shorter is better for liquidity. A negative cycle (some grocery/fast-turn retailers) indicates collection before paying suppliers—highly cash-efficient but not always feasible. The goal is to reduce the cycle without harming sales or supplier relations (Atrill & McLaney, 2022).

1. b) Target quick ratio and sales-to-net working capital for 2024

Agency relationships arise when managers (agents) make decisions on behalf of shareholders (principals). Conflicts occur when managerial goals diverge from shareholder wealth maximization, such as empire building or excessive perks.

Corporate governance mechanisms like board oversight, executive compensation, audits, and shareholder activism reduce these conflicts (Jensen & Meckling, 1976).

2024 assumptions: Sales remain $40m; Cost of Sales = 60% of sales = $24m. Current assets = inventory + receivables. Current liabilities = payables + overdraft. Target ratios: Inventory 60 days, Receivables 75 days, Payables 55 days, Current ratio 1.4×.

1. Target working capital balances (from days):

• Inventory = 60/365 × 24,000,000 = $3,945,205
• Receivables = 75/365 × 40,000,000 = $8,219,178
• Payables = 55/365 × 24,000,000 = $3,616,438

So Current Assets (CA) = 3,945,205 + 8,219,178 = $12,164,384.

1. Use target current ratio (CA/CL = 1.4) to get CL:

CL = CA / 1.4 = $8,688,845.

This implies Overdraft = CL − Payables = 8,688,845 − 3,616,438 = $5,072,407.

1. Target quick ratio (acid test):
   Quick Ratio = (CA − Inventory) / CL = Receivables / CL
   = 8,219,178 / 8,688,845 = 0.946 ≈ 0.95
2. Target Sales-to-Net Working Capital (NWC):
   NWC = CA − CL = 12,164,384 − 8,688,845 = $3,475,538
   Sales/NWC = 40,000,000 / 3,475,538 = 11.51×

Answers:

• Target quick (acid-test) ratio = 0.95
• Target sales-to-net working capital = 11.51×

1. c) Comparative Analysis: March 2023 vs March 2024

The stock market plays a critical role in evaluating corporate performance. Share prices reflect collective investor expectations, incorporating information about risk, growth, and earnings prospects. This process is supported by the efficient market hypothesis, which suggests that prices adjust quickly to new information (Fama, 1970).

(c) Comparison of 2023 vs 2024 positions and policy implications

Snapshot of positions (rounded to nearest $’000)

Item (US$’000)	Mar-2023	Mar-2024 Target
Inventory	5,700	3,945
Trade receivables	6,575	8,219
Current assets (CA)	12,275	12,164
Trade payables	2,137	3,616
Overdraft	4,682	5,072
Current liabilities (CL)	6,819	8,689
Net working capital (CA−CL)	5,456	3,476
Current ratio	1.80×	1.40×
Quick ratio	0.96×	0.95×
Working capital cycle (days)	110	80 (60+75−55)

Analysis and interpretation:

• Efficiency moves: Inventory days drop 80 → 60 (inventory falls by ~$1.8m), signalling tighter stock control. Payables days rise 30 → 55, increasing supplier financing.
• Commercial trade-off: Receivables days rise 60 → 75, lifting receivables by ~$1.6m—this may support sales/market terms but increases credit risk and cash tied in debtors.
• Liquidity metrics: Current ratio reduces 1.80 → 1.40; quick ratio edges down 0.96 → 0.95. Net working capital shrinks from ~$5.46m to ~$3.48m.
• Debt-like funding within working capital: Overdraft increases (~$4.68m → ~$5.07m) and payables rise, both financing a greater share of the operating cycle.
• Cash conversion improvement: The WCC improves from 110 to 80 days, which is positive for cash velocity, but the firm is simultaneously operating with a thinner liquidity buffer.

Policy conclusion:

ANGLIA LTD appears to be shifting toward a more aggressive working capital financing policy: lower NWC and current ratio, higher reliance on short-term finance (overdraft + extended payables), while improving operational efficiency (lower inventory days). This can enhance returns but increases refinancing and liquidity risk if cash inflows underperform (Hill, Kelly & Highfield, 2010; Brealey, Myers & Allen, 2020). Prudent monitoring of receivables quality and supplier relationships is essential.

1. d) Three internal methods to manage foreign currency transaction risk

Ethics and corporate social responsibility (CSR) are vital in financial decision-making.

Unethical practices or neglect of stakeholders can damage reputation, increase costs, and reduce shareholder value. Firms adopting CSR often benefit from enhanced trust, brand reputation, and long-term profitability (Carroll & Brown, 2018).

1. Currency of Invoicing Policy (Home-currency invoicing):
   Price exports in USD (home currency) where bargaining power allows, shifting transaction risk to buyers and stabilising cash inflows. The trade-off is potential competitiveness loss if rivals invoice in the customer’s currency (Madura, 2021).
2. Natural Hedging via Matching:
   Match foreign-currency receivables with payables in the same currency (e.g., source inputs from euro-zone suppliers to offset euro-receipts). This reduces net open positions without derivatives and avoids hedging costs (Shapiro & Sarin, 2009).
3. Leading and Lagging:
   Adjust payment/collection timing based on expected FX moves and interest differentials—lead collections/payments in a currency expected to depreciate, lag when appreciation is expected (subject to commercial relationships and terms). This is a flexible, internal timing tool but relies on disciplined forecasting and counterpart consent (Madura, 2021).

(Other internal practices—e.g., intra-group netting, currency clauses, and diversification of currency exposures—can complement the above.)

Question 2: Capital Structure and WACC

(a) WACC for Alpha Enterprise and Delta Limited (No Taxes)

Step 1: Recall the WACC formula

W ACC= (E/V×Re) + (D/V×Rd)

Where:

• EEE = Market value of equity
• DDD = Market value of debt
• V=E+DV = E + DV=E+D = Total firm value
• ReReRe = Cost of equity (CAPM)
• RdRdRd = Cost of debt

Step 2: Calculate cost of equity using CAPM

Re=Rf+β(Rm−Rf)

• Risk-free rate Rf=4%
• Market return Rm=12%
• Market risk premium = 12−4=8%

For Alpha Enterprise (β = 1.0):

ReA=4%+(1.0×8%)=12%

For Delta Limited (β = 1.375):

ReD=4%+(1.375×8%)=15%

Step 3: Apply WACC formula

Alpha Enterprise (20% Debt, 80% Equity, Rd = 7%):

W ACCA=(0.8×12%)+(0.2×7%)

W ACCA=9.6%+1.4%=11.0%

Delta Limited (50% Debt, 50% Equity, Rd = 7%):

WACCD=(0.5×15%)+(0.5×7%)

WACCD=7.5%+3.5%=11.0%

Result: Without taxes, both Alpha and Delta have the same WACC of 11%, despite different capital structures.

(b) WACC with Corporate Tax (T = 34%)

Step 1: Adjust WACC formula with tax shield

WACC=(E/V×Re)+(D/V×Rd×(1−T))

Step 2: Recalculate

Alpha Enterprise (80% equity, 20% debt):

WACCA=(0.8×12%)+(0.2×7%×(1−0.34))

WACCA=9.6%+(0.2×4.62%)=9.6%+0.924%=10.52%

Delta Limited (50% equity, 50% debt):

WACCD=(0.5×15%)+(0.5×7%×(1−0.34))

WACCD=7.5%+(0.5×4.62%)=7.5%+2.31%=9.81%

Result with taxes:

• Alpha WACC = 10.52%
• Delta WACC = 9.81%

Step 3: Conclusion

The tax shield on debt reduces the after-tax cost of debt, lowering WACC. Since Delta has more debt (50%), its WACC decreases more significantly than Alpha’s (20%). This illustrates Modigliani and Miller’s Proposition with taxes: debt financing creates value through tax savings (Modigliani & Miller, 1963).

(c) Simplifying Assumptions and Pitfalls in WACC Use

When using WACC as a project discounting tool, managers often make simplifying assumptions:

1. Constant Capital Structure: Assumes debt-to-equity ratio remains unchanged, ignoring financing adjustments (Brealey et al., 2020).
2. Single Risk Profile: Assumes all projects carry the same business and financial risk as the overall firm. In reality, new projects may have very different risk exposures (Damodaran, 2015).
3. Perfect Capital Markets: Assumes no transaction costs, taxes, or bankruptcy risks beyond the tax shield effect.

Common pitfalls include:

• Using firm-wide WACC for all projects: This can misprice high-risk or low-risk projects, leading to wrong acceptance/rejection decisions (Hillier et al., 2021).
• Ignoring currency or country risk: Especially critical for multinational firms like Delta.
• Overestimating the tax shield benefit: If profits fall, tax savings may not materialize.

Best practice: Firms should adjust discount rates for project-specific risks or use divisional hurdle rates.

(d) Direct and Indirect Costs of Bankruptcy

Direct Costs (measurable, out-of-pocket):

1. Legal and Administrative Fees: Costs of court proceedings, lawyers, and restructuring professionals.
2. Asset Liquidation Discounts: Distressed sales often reduce asset value realization.
3. Compliance and Advisory Costs: Hiring auditors, consultants, and regulatory advisors.

Indirect Costs (opportunity-related, harder to measure):

1. Loss of Customers and Suppliers: Stakeholders avoid doing business with a distressed firm (Warner, 1977).
2. Employee Attrition and Morale Damage: Skilled employees may leave, reducing productivity.
3. Loss of Financing Access: Higher borrowing costs or withdrawal of credit facilities.
4. Management Distraction: Focus shifts from operations to survival.

Which are most discouraging?

• Indirect costs (e.g., loss of reputation, customers, and supplier trust) are often greater than direct costs and harder to recover from.
• Managers often avoid high leverage mainly to protect reputation and stakeholder confidence, rather than to avoid legal fees (Brealey et al., 2020).

Conclusion: While direct costs are significant, indirect costs are the key deterrent against excessive debt usage.

Question 3: Investment Appraisal

(a) Net Present Value (NPV) & Discounted Payback

Step 1: Adjust sales and costs for inflation

• Selling price inflation = 4% annually.
• Variable cost inflation = 3% annually.
• Fixed costs are already given in nominal terms (so no adjustment needed).

Nominal selling prices per unit:

• Year 1 = 30.00 × (1.04)^0 = 30.00
• Year 2 = 30.00 × (1.04)^1 = 31.20
• Year 3 = 30.00 × (1.04)^2 = 32.45
• Year 4 = 30.00 × (1.04)^3 = 33.75

Nominal variable costs per unit:

• Year 1 = 10.00 × (1.03)^0 = 10.00
• Year 2 = 10.20 × (1.03)^1 = 10.51
• Year 3 = 10.61 × (1.03)^2 = 11.25
• Year 4 = 10.93 × (1.03)^3 = 11.95

Step 2: Calculate revenues, costs, and operating cash flows

Revenue=Sales Volume×Selling Price

Variable Cost=Sales Volume×Variable Cost per unit

EBITDA=Revenue−Variable Cost−Fixed Cost

Year	Sales Vol.	Price ($)	Revenue ($m)	Var. Cost/unit ($)	Var. Cost ($m)	Fixed Cost ($m)	EBITDA ($m)
1	520,000	30.00	15.60	10.00	5.20	0.70	9.70
2	624,000	31.20	19.45	10.51	6.56	0.735	12.15
3	717,000	32.45	23.27	11.25	8.07	0.779	14.42
4	788,000	33.75	26.61	11.95	9.42	0.841	16.35

Step 3: Depreciation (25% reducing balance)

Initial investment = $25m.

• Year 1 depreciation = 25% × 25 = 6.25m
• Year 2 depreciation = 25% × (25 – 6.25) = 4.69m
• Year 3 depreciation = 25% × (25 – 6.25 – 4.69) = 3.52m
• Year 4 depreciation = 25% × (remaining 10.55m) = 2.64m

Step 4: EBIT, tax, and operating cash flows

EBIT=EBITDA−Depreciation

Tax rate = 30%, payable one year in arrears.

Year	EBITDA	Depreciation	EBIT	Tax (30%)	Net Income	OCF = Net Income + Depreciation
1	9.70	6.25	3.45	1.035 (paid in Y2)	2.415	8.665
2	12.15	4.69	7.46	2.238 (paid in Y3)	5.222	9.912
3	14.42	3.52	10.90	3.270 (paid in Y4)	7.630	11.150
4	16.35	2.64	13.71	4.113 (paid in Y5)	9.597	12.237

Step 5: Adjust for terminal value and tax timing

• Terminal value = 5% × 25m = 1.25m (received at end of Year 4).
• Add tax lags (each year’s tax paid next year).
• At Year 4, we still owe Year 4 tax (4.113m), paid in Year 5 — outside evaluation horizon. But since directors require 4-year evaluation, we must deduct tax lag at terminal stage.

Step 6: Net cash flows

Year	Cash Flow Details	Net CF ($m)
0	Initial investment	-25.000
1	OCF (after tax lag) = 8.665 (no tax paid yet)	8.665
2	OCF – Y1 tax = 9.912 – 1.035	8.877
3	OCF – Y2 tax = 11.150 – 2.238	8.912
4	OCF – Y3 tax – Y4 tax + Terminal value = 12.237 – 3.270 – 4.113 + 1.25	6.104

Step 7: Discount using nominal WACC (12%)

NPV=∑CFt/(1+0.12)t

Year	Net CF ($m)	PV Factor (12%)	PV ($m)
0	-25.000	1.000	-25.000
1	8.665	0.893	7.738
2	8.877	0.797	7.076
3	8.912	0.712	6.344
4	6.104	0.636	3.884

NPV=−25+7.738+7.076+6.344+3.884=−0.042 m

NPV ≈ –$0.04m (slightly negative)

Step 8: Discounted Payback Period

Cumulative PV inflows:

• After Year 1: 7.738
• After Year 2: 14.814
• After Year 3: 21.158
• After Year 4: 25.042

The project repays investment just before end of Year 4.

• Payback period ≈ 3.98 years.

Since directors’ cutoff = 2 years, project fails payback test.

(b) Financial Acceptability

• NPV ≈ –0.04m: Suggests project marginally destroys value at 12% cost of capital. NPV criterion recommends rejection (Damodaran, 2015).
• Discounted Payback (3.98 years): Fails strict 2-year threshold. Liquidity preference of management is not satisfied (Hillier et al., 2021).
• Terminal value assumption: Even with salvage value, project is borderline.
• Risk: High sensitivity to cost of capital or inflation. A slight improvement in revenues or reduction in costs could make NPV positive.

Conclusion: Financially, the project is not acceptable under strict evaluation rules.

(c) Critique of Directors’ Appraisal Views

The directors require:

1. 4-year horizon only:
   • Ignores project’s continuing cash flows (Year 4 sales are assumed sustainable).
   • Artificial truncation undervalues long-term investments (Brealey et al., 2020).
2. NPV & Discounted Payback jointly:
   • NPV is superior as it measures wealth creation.
   • Discounted Payback is biased toward short-term liquidity and may reject profitable long-term projects (Ross et al., 2019).
3. Terminal value fixed at 5%:
   • Arbitrary assumption; should be based on residual cash flow perpetuity or market-based estimates.
4. Strict 2-year cutoff:
   • Very restrictive, may cause underinvestment in profitable projects.
   • Suitable only in highly uncertain or cash-constrained environments.

Critical view: While caution is understandable, the directors’ approach is too conservative, undervaluing long-term strategic opportunities. A more balanced use of NPV with sensitivity/scenario analysis would provide better decision support.

Question 4: Bond Valuation and Types

(a) Bond Pricing and Yield Relationship

Given:

• Face value (FV) = $2,000
• Coupon rate = 6% → Annual coupon = 6% × 2,000 = $120
• Maturity = 10 years
• Yield to maturity (YTM) cases: 8% and 4%

Step 1: Price formula for a bond

P=∑t=1n C/(1+YTM)t+FV(1+YTM)n

Where:

• CCC = annual coupon payment
• FVFVFV = face value
• n = number of years to maturity

Case 1: YTM = 8%

P=120×(1−(1+0.08)−100.08)+2000(1.08)10P = 120 \times \left( \frac{1 – (1+0.08)^{-10}}{0.08} \right) + \frac{2000}{(1.08)^{10}}P=120×(0.081−(1+0.08)−10​)+(1.08)102000​ P=120×(6.71)+926.40P = 120 \times (6.71) + 926.40P=120×(6.71)+926.40 P=805.20+926.40=1,731.60P = 805.20 + 926.40 = \mathbf{1,731.60}P=805.20+926.40=1,731.60

Case 2: YTM = 4%

P=120×(1−(1+0.04)−100.04)+2000(1.04)10P = 120 \times \left( \frac{1 – (1+0.04)^{-10}}{0.04} \right) + \frac{2000}{(1.04)^{10}}P=120×(0.041−(1+0.04)−10​)+(1.04)102000​ P=120×(8.11)+1,351.00P = 120 \times (8.11) + 1,351.00P=120×(8.11)+1,351.00 P=973.20+1,351.00=2,324.20P = 973.20 + 1,351.00 = \mathbf{2,324.20}P=973.20+1,351.00=2,324.20

Step 2: Interpretation

• When YTM rises (8%), bond price falls to $1,731.60.
• When YTM falls (4%), bond price rises to $2,324.20.
• Conclusion: Bond prices and yields move inversely — as interest rates (YTM) increase, bond prices fall, and vice versa (Brealey et al., 2020).

(b) Bond Valuation with Different Yields

Given:

• Coupon = £70 annually
• FV = £1,000
• Term = 8 years
• YTM (given case) = 9%

Step 1: Value at 9% YTM

P=70×(1−(1+0.09)−80.09)+1000(1.09)8P = 70 \times \left( \frac{1 – (1+0.09)^{-8}}{0.09} \right) + \frac{1000}{(1.09)^8}P=70×(0.091−(1+0.09)−8​)+(1.09)81000​ P=70×5.5348+501.87P = 70 \times 5.5348 + 501.87P=70×5.5348+501.87 P=387.44+501.87=889.31P = 387.44 + 501.87 = \mathbf{889.31}P=387.44+501.87=889.31

So, at a 9% yield, fair bond value = £889.31.

Step 2: Offered Price = £1030.44 → Find YTM

We need to solve:

1030.44=70×(1−(1+YTM)−8YTM)+1000(1+YTM)81030.44 = 70 \times \left( \frac{1 – (1+YTM)^{-8}}{YTM} \right) + \frac{1000}{(1+YTM)^8}1030.44=70×(YTM1−(1+YTM)−8​)+(1+YTM)81000​

This requires trial & error / interpolation:

• At 7% YTM:

P=70×5.9713+10001.078P = 70 \times 5.9713 + \frac{1000}{1.07^8}P=70×5.9713+1.0781000​ P=418.00+582.01=1000.01P = 418.00 + 582.01 = 1000.01P=418.00+582.01=1000.01

• At 6.5% YTM:

P=70×6.2098+10001.0658P = 70 \times 6.2098 + \frac{1000}{1.065^8}P=70×6.2098+1.06581000​ P=434.69+609.56=1044.25P = 434.69 + 609.56 = 1044.25P=434.69+609.56=1044.25

Since £1030.44 lies between £1000 (at 7%) and £1044.25 (at 6.5%), the YTM ≈ 6.7%.

Conclusion: At £1030.44, the investor’s required yield is ~ 6.7%, lower than 9% market yield. Hence, the bond is overpriced relative to market.

(c) Types of Bonds

1. Domestic Bonds:
   • Issued in the home country, in the local currency, by a domestic borrower.
   • Example: A U.S. company issuing dollar-denominated bonds in the U.S. market.
2. Foreign Bonds:
   • Issued by a foreign borrower in the domestic market, denominated in the domestic currency.
   • Example: A Japanese company issuing “Yankee bonds” in the U.S. in U.S. dollars.
3. Eurobonds:
   • International bonds issued outside the jurisdiction of any single country, denominated in a currency not native to where issued.
   • Example: A U.S. corporation issuing Eurodollar bonds in London, denominated in USD.

Key difference:

• Domestic = local issuer, local market.
• Foreign = foreign issuer, local market.
• Eurobond = global market, usually underwritten by international syndicates, less regulated (Fabozzi, 2021).

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill.

Carroll, A. B., & Brown, J. A. (2018). Corporate social responsibility: A review of current concepts, research, and issues. Business & Society, 57(1), 7-28.

Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Wiley.

Fabozzi, F. J. (2021). Bond Markets, Analysis, and Strategies (10th ed.). Pearson.

Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417.

Hillier, D., Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2021). Corporate Finance (4th European ed.). McGraw-Hill.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360.

Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433–443.

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill.

Tuckman, B., & Serrat, A. (2011). Fixed Income Securities: Tools for Today’s Markets (3rd ed.). Wiley.

Warner, J. B. (1977). Bankruptcy costs: Some evidence. Journal of Finance, 32(2), 337–347.

Detailed Assessment Instructions for the FIN7007 Managing Strategic Finance and Risk Assignment

FIN7007

Managing Strategic Finance and Risk

Time Constrained Assessment

Date for Submission: Please refer to the timetable on ilearn

(The submission portal on ilearn will close at 12:00 UK time on the date of submission)

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Template: V5

Assessment Brief

As part of the formal assessment for the programme you are required to submit a

Managing Strategic Finance and Risk assessment. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments.

Learning Outcomes:

After completing the module, you should be able to:

1. Evaluate the role of financial management in achieving the strategic objectives of a firm.
2. Examine and apply effective investment appraisal techniques for a firm’s capital budgets and investments.
3. Assess working capital management techniques and corporate strategy.
4. Evaluate and apply principles of business and asset valuations and financial risk management approaches.

All learning outcomes must be met to pass the module.

Guidance

Your assignment should include: a title page containing your student number, the module name, the submission deadline and the exact word count of your submitted document; the appendices if relevant; and a reference list in (see referencing section for more information). You should address all the elements of the assignment task listed below. Please note that tutors will use the assessment criteria set out below in assessing your work.

You must not include your name in your submission because Arden University operates anonymous marking, which means that markers should not be aware of the identity of the student. However, please do not forget to include your STU number.

Assessment Instructions Instructions:

This assessment should take you no longer than 4 hours and can be completed at any

point during the 24-hour window. Please ensure you give yourself adequate time to upload your completed paper to Turnitin.

For further guidance on the TCA assessment please click on this link:

https://vimeo.com/398870288/2283356462

Questions

Question 1

The current assets and current liabilities of ANGLIA LTD at the end of March 2023 are as follows:

	$000	$000
Inventory	5,700
Trade receivables	6,575 ––––––	12,275
Trade payables	2,137
Overdraft	4,682	6,819
Net current assets	––––––	––––––– 5,456
		–––––––

For the year ending 31^st March 2023, ANGLIA LTD had domestic and foreign sales of $40 million, all on credit, while cost of sales was $26 million. Trade payables related to both domestic and foreign suppliers.

For the year ending 31^st March 2024, ANGLIA LTD has forecast that credit sales will remain at $40 million while cost of sales will fall to 60% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the company’s overdraft.

ANGLIA LTD also plans to achieve the following target working capital ratio values for the year ending 31^st March 2024:

Inventory days:                 60 days Trade receivables day: 75 days Trade payables days: 55 days Current ratio:     1.4 times

Required:

1. Calculate the working capital cycle (cash collection cycle) of ANGLIA LTD as at 31^st March 2023 and discuss whether a working capital cycle should be positive or negative.

(6 marks)

2024. Calculate the target quick ratio (acid test ratio) and the target ratio of sales to net working capital of ANGLIA LTD as at 31^st March 2024.

(5 marks)

1. Analyse and compare the current asset and current liability positions for March 2023 and March 2024 and discuss how the working capital financing policy of ANGLIA LTD would have changed.

(8 marks)

1. Briefly discuss THREE internal methods which could be used by ANGLIA LTD to manage foreign currency transaction risk arising from its continuing business activities.

(6 marks)

(Total 25 marks)

Question 2

Alpha Enterprise’s capital structure contains 20% debt and 80% equity. Delta Limited’s capital structure contains 50% debt and 50% equity.

Both firms pay 7% annual interest on their debt. Alpha’s shares have a beta of 1.0 and Firm Delta’s beta of 1.375. The risk-free rate of interest equals 4%, and the expected return on the market portfolio equals 12%.

Required:

1. Calculate the WACC for each firm assuming there are no taxes.

(6 marks)

1. Recalculate the WACC figures assuming that the two firms face a marginal tax rate of 34%. What do you conclude about the impact of taxes from your WACC calculations?

(4 marks)

1. Explain the simplifying assumptions managers make when using WACC as a project discounting method and discuss some of the common pitfalls when using WACC in capital budgeting.

(8 marks)

1. What are the important direct and indirect costs of bankruptcy? Which of these, do you think, are the most important in discouraging maximum debt use by corporate managers?

(7 marks)

(Total 25 marks)

Question 3

The directors of Rivendell Plc are considering a planned investment project costing $25m, payable at the start of the first year of operation. The following information relates to the investment project:

Year 1    Year 2    Year 3				Year 4
Sales volume (units/year)	520,000	624,000	717,000	788,000
Selling price ($/unit)	30.00	30.00	30.00	30.00
Variable costs ($/unit)	10.00	10.20	10.61	10.93
Fixed costs ($/year)	700,000	735,000	779,000	841,000

This information needs adjusting to take account of selling price inflation of 4% per year and variable cost inflation of 3% per year. The fixed costs, which are incremental and related to the investment project, are in nominal terms. The year 4 sales volume is expected to continue for the foreseeable future.

Rivendell Plc pays corporation tax of 30% one year in arrears. The company can claim tax- allowable depreciation on a 25% reducing balance basis. The views of the directors of Rivendell Plc are that all investment projects must be evaluated over four years of operations, with an assumed terminal value at the end of the fourth year of 5% of the initial investment cost. Both net present value and discounted payback must be used, with a maximum discounted payback period of two years. The real after-tax cost of capital of Rivendell Plc is 7% and its nominal after-tax cost of capital is 12%.

Required:

1. Calculate the net present value and the discounted payback period of the planned investment project using the nominal after-tax cost of capital.

(11 marks)

1. Discuss the financial acceptability of the investment project.

(6 marks)

1. Critically discuss the views of the directors on Rivendell Plc’s investment appraisal.

(8 marks)

(Total 25 marks)

Question 4

1. Goodfellow Inc. is a sportswear company listed on the New York Stock Exchange. The company issues corporate bonds to raise finance for short term project. It has a bond with a face value of $2000, a coupon rate of 6% and matures in 10 years’ time. If its current yield to maturity is 8% what is the current price of the bond?

If the yield falls to 4% what is the price of the bond? What do these results indicate about the relationship between the price of a bond and its yield to maturity?

(10 marks)

1. You are asked to put a value on a bond which promises eight annual coupon payments of

£70 and will repay its face value of £1000 at the end of eight years. You observe that other similar bonds have yields to maturity of 9 per cent. How much is this bond worth? You are offered the bond for a price of £1030.44. What yield to maturity does this represent?

(8 marks)

1. Explain the difference between a domestic bond, foreign bond and Eurobond, giving examples of each type of bond.

(7 marks)

(Total: 25 Marks) [Grand Total: 100 Marks]

End of Questions

Referencing Guidance

You MUST underpin your analysis and evaluation of the key issues with appropriate and wide ranging academic research and ensure this is referenced using the AU Harvard system(s).

Follow this link to find the referencing guides for your subject: Arden Library

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