CFM- Assignment
Some useful details

Submission
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• The final date of submission is May 16, 2023 until
11.59pm,

Starting point

Sections of the assignment

Rubrics

An outstanding essay qualifies through these
Should answer all sections in
all details mentioned in the
assessment brief
Have fantastic work out,
analysis, interpretation and
conclusion
Use excellent tables and
charts
Have used good quality
literature sources and
grounded your analysis,
interpretation and
conclusion based on theories
Shows connections between
your findings from each
sesctions
Showcase an outlook for the
future in the sections and in
general conclusions
Not limited to this guidance
☺ you will have something
extra ☺
Word limits and penalties for
assignments • 3000 words in total
• If the assignment is within +10% of the stated
word limit no penalty will apply.
• The word count is to be declared on the front
page of your assignment and the assignment cover
sheet.
• Please note, in text citations [e.g. (Smith, 2011)]
and direct secondary quotations [e.g. “dib-dab
nonsense analysis” (Smith, 2011 p.123)] are
INCLUDED in the word count.
• If this word count is falsified, students are
reminded that under ARNA page 30 Section 3.4 this
will be regarded as academic misconduct.
• If the word limit of the full assignment exceeds
the +10% limit, 10% of the mark provisionally
awarded to the assignment will be deducted.
• For example: if the assignment is worth 70
marks but is above the word limit by more
than 10%, a penalty of 7 marks will be
imposed, giving a final mark of 63.

The word count does not include:
Academic Misconduct
• The Assessment Regulations for Northumbria Awards (ARNA) contain the Regulations
and procedures applying to cheating, plagiarism and other forms of academic
misconduct.
• The full policy is available at:
http://www.northumbria.ac.uk/sd/central/ar/qualitysupport/asspolicies/
• You are reminded that plagiarism, collusion and other forms of academic misconduct as
referred to in the Academic Misconduct procedure of the assessment regulations are taken
very seriously by Newcastle Business School. Assignments in which evidence of plagiarism
or other forms of academicmisconduct is found may receive a mark of zero.
Note: Students must retain an electronic copy of this assignment and it must be made
availablewithin 24 hours of them requesting it be submitted.
SECTION 1
Evaluate and discuss the financial performance of
the company over the period of analysis.
20 marks
SECTION 1
Evaluate and discuss the
financial performance of
the company over the
period of analysis.
20 marks

1.a. General review of the income statements
• 5 Year period analysis
• Profitability ratios – GPM, NPM,
OPM, revenue, opex trends,
dividend paid / profitability:
gross, operating, pretax, and
after tax.Interest expense:
• – Vertical analysis; Horizontal
analysis
• Understanding the Income
Statement (investopedia.com)
Vertical analysis-Common Analysis
The key metrics we look at are:
• Cost of Goods Sold (COGS) as a percent of revenue
• Gross profit as a percent of revenue
• Depreciation as a percent of revenue
• Selling General & Administrative (SG&A) as a percent of
revenue
• Interest as a percent of revenue
• Earnings Before Tax (EBT) as a percent of revenue
• Tax as a percent of revenue
• Net earnings as a percent of revenue
• we will look up and down the income statement (hence, “vertical”
analysis)
• we do a thorough analysis of the income statement by seeing each line
item as a proportion/ percentage of revenue.
• Vertical analysis formula = (Statement line item / Total base
figure) X 100.
https://www.youtube.com/watch?v=NSwslxfWcNA

Horizontal
analysis- Trend
Analysis
• With horizontal analysis, we look across the
income statement at the year-overyear (YoY) change in each line item.
• You need to take the value in Period N and
divide it by the value in Period N-1 and
then subtract 1 from that number to get
the percent change
• Horizontal analysis formula = {(Comparison
year amount – Base year amount) / Base year
amount} X 100.
• For example, revenue in 2017 was $4,000,
and in 2016, it was $3,000. The YoY change
in revenue is equal to $4,000 / $3,000
minus one, which equals 33%.
(265) Creating Vertical & Horizontal Analysis Statements

1.b. Working
capital
management
policy
• 5 year period analysis
• Businesses don’t go bankrupt just because they’re not
profitable. Most business bankruptcies occur because
the company’s cash reserves ran dry, and they can’t
meet their current payment obligations. An otherwise
profitable company may also run out of cash because
of the increasing capital requirements of new
investments as they grow.
• 4 Main Components of Working Capital
• Trade Receivables. It is also known as account
receivables and is represented as current
liabilities in balance sheet.
• Inventory.
• Cash and Bank Balances.
• Trade Payables.
The working
capital ratio
• Working Capital Ratio or
Current Ratio = Current
Assets / Current Liabilities.
• Quick Ratio or Acid Test
Ratio = (Current Assets –
Inventory)/ Current
Liabilities
• ideal working capital ratio to
be between 1.5 and 2.
• You can compare your
company’s ratio to those of
similar companies within its
industry/ industry average
• Negative working capital occurs when
a business has more current liabilities
than current assets. This situation can be
a cause for concern for lenders and
creditors, since the firm may not have
sufficient liquid assets to pay for its shortterm obligations.
• Negative working capital is unusual.
• A company’s working capital ratio can
be too high in that an excessively high
ratio might indicate operational
inefficiency. A high ratio can mean a
company is leaving a large amount of
assets sit idle, instead of investing those
assets to grow and expand its business.
Cash Conversion Cycle
• The efficiency of a firm’s
Working Capital Management
(WCM) can be measured
through the Cash Conversion
Cycle (CCC) (see equation 1).
(McClellan, 2012).
Cash Conversion Cycle and WCM issues
As an analyst you are asked to view the accounts for G and comment on it’s cash
position. The last two years of accounts for G are set out below:
2012 2013
£m £m
Raw Materials Inventory 2 3
Creditors 14 15
Work in Progress Inventory 2 5
Finished Goods Inventory 9 10
Debtors 2.5 3
Sales 57 63
Raw Materials Purchases for Year 42 45
Cost of Goods Sold for Year 49 52
i) Calculate the Cash Conversion Cycle for each of the two years
shown for G Plc and comment on your results.
ii) Discuss how alternative working capital management strategy’s
may affect this cycle and the overall effect on business
performance if each were adopted.
2012 2013 2013/2012
Data Sales 57 63 11%
COGS 49 52 6%
RM purchases 42 45 7%
RM Stocks 2 3 50%
WIP stocks 2 5 150%
FG Stocks 9 10 11%
Debtors 2.5 3 20%
Creditors 14 15 7%
Cash Conversion Cycles (CCC)
Raw material stock period 2012 Days 2013 Days
Days
Difference
2013 at
2012
days
Raw material stock £ 2.00 17.4 £ 3.00 24.3 7.0 RM stock £ 2.14
RM Purchases £ 42.00 £ 45.00
Less average supplier credit period
Creditors £ 14.00 -121.7 £ 15.00 -121.7
RM Purchases £ 42.00 £ 45.00
add WIP period
WIP £ 2.00 14.9 £ 5.00 35.1 20.2 £ 2.12
COGS £ 49.00 £ 52.00
add FG Period
FG £ 9.00 67.0 £ 10.00 70.2 3.2 £ 9.55
COGS £ 49.00 £ 52.00
add Debtors conversion period
Debtors £ 2.50 16.0 £ 3.00 17.4 1.4 £ 2.76
Sales £ 57.00 £ 63.00
CCC Days -6.3 25.3 31.7
Current Ratio
Curent Assets
Stock
RM £2.00 £3.00
WIP £2.00 £5.00
FG £9.00 £10.00
Debtors £2.50 £3.00
Cash
£15.50 £21.00
Current Liabilities
Creditors -£14.00 -£15.00
Cash
Working Capital £1.50 £6.00 400%
Quick Assets
Current assets less stock
Debtors £2.50 £3.00
Cash
Current Liabilities
Creditors -£14.00 -£15.00
Cash
Working Capital (Quick assets) -£11.50 -£12.00
If the 2013 balances had been maintained at the 2012 days
then the balances would have been as shown here.
In all cases (except creditors) the balances are in excess of what
would have been expected if 2012 days had been maintained.
This suggests a loosening of control of these elements of WC.
There is therefore a greater investment by the firm in WC from
longer term sources of finance. While this may be safer for the firm
or the result of a planned strategy for instance to impove delivery
times and grow sales through extended credit terms this may also
result in reduced returns (ROCE etc) as the additional WCM
Calculation of Cash-Conversion Cycle: Worked Example
CCC
calculation
Working Capital
Policies
A Relaxed Attitude
(Conservative Attitude)
A Moderate Attitude
An Aggressive Attitude
Policies for
working capitalRelaxed
• In a relaxed approach you have
large cash balances or large near cash
balances, grant more generous
customer credit and/or maintain
higher inventories.
• In businesses which operate in an
uncertain (or unstable) environment
and there is a need to maintain high
levels of stocks, WIP & finished goods
to avoid productions stoppages or
lost sales due to stock outs this may
be a suitable policy. Customers could
demand longer to pay and suppliers
are less generous with credit
Policies for working capital-Aggressive
An aggressive approach is more likely to be
taken in an environment of greater certainty over
future cash flows which permits working capital to
be kept a relatively low levels.
Here, the company holds minimal safety stocks
of cash and inventory and/or would press
customers for relatively early settlement while
pushing trade creditors to increase the time
given to repay. A aggressive policy will exhibit a
shorter cash conversion cycle and less cash would
be tied up in the business.
Risk of Stock out and failure to supply customers
Loss of lines of supply due to poor creditor relationships.
Loss of sales due to reduced debtor collection period offered
Limited levels of cash
1.C Review of the dividend policy

1d. Historical share
price performance
• Analyse share price for 5 years quarterly- using charts & events
• Download share price from Bloomberg / yahoo finance (annual)/monthly for 5 years and analyse returns using LN functions
in excel or
• (259) Analyze Stock Data with Microsoft Excel – YouTube
• (259) stock returns regression in excel – YouTube
• Average returns – annual /monthly + standard deviation
• Compare with competitors, FTSE performance
• Analyse PE ratio over a period of time and comment
SECTION 2
Estimate the share price of the company by means of
the Dividend Discount and the Capital Asset Pricing
models.
40 marks
SECTION 2
Estimate the share
price of the
company by means
of the Dividend
Discount and the
Capital Asset Pricing
models.
40 marks
• Estimate the share price of the company by
means of the
2a. Dividend Discount and
2b Capital Asset Pricing models.
• For this task use the sensitivity analysis in
relation to the variables which are hard to
predict and/or accurately estimate.
• Relate the obtained result to the market
estimate of the share price and comment on
the reasons behind possible differences
citing relevant theories.
2.A Estimate the share price of the company by means of the – Gordon’s Dividend
Discount Model
Gordon’s Growth Model (GGM) in
determining the stock price of a company,
• Make a table of dividends per share
• Find growth rate – g-or use yahoo financeyahoo finance/ company/ analysis /growth
estimates /next five years
• Find cost of equity-Ke use yahoo finance –
yahoo finance/ company/
statistics/management effectiveness/return on
equity
• Refer to the excel sheet- Gordon formula
• Sensitivity analysis – sample refer to excel
and see a sample sentivity analysis and
use it for Ke & G
https://www.youtube.com/watch?v=N924D
6tGOG8

2.B Estimate the share price of the company by means of the – CAPM Model
https://www.youtube.com
/watch?v=ucKK528ApCw
https://www.youtube.com
/watch?v=9PmDyGShF4I
https://www.youtube.com
/watch?v=rPY2wGyOtGM
SECTION 3
Discuss the capital structure of the company using the
company’s balance sheet in the context of the Modigliani and
Miller theories on capital structure and prepare a
constructive critique of these theories.
40 marks
3. Discuss the capital structure of the company using the company’s balance sheet in the context of
the Modigliani and Miller theories on capital structure and prepare a constructive critique of these
theories.
Your discussion should involve various balance sheet items such total equity, total debt, and other
relevant information.
• Need to be really creative and
wise in preparing this section.
• Modigliani and Miller theory – 1
(without tax)
• Modigliani and Miller theory -2
(with tax)
• Connect with other theories
(optional)
• Equity
• Long term debt
Whitbread Plc
Equity Composition 27/02/2020 28/02/2019 01/03/2018 02/03/2017 03/03/2016
£ (Millions) £ (Millions) £ (Millions) £ (Millions) £ (Millions)
Share Capital: 112.9 150.6 150.4 150.2 150
Share Premium
Account: 90.8 81.5 73.2 68 62.6
Other Reserves: -2,316.80 -2,517.70 -2,015.80 -2,020.80 -2,049.80
Retained Earnings: 5,861.90 7,938.30 4,594.70 4,330.90 4,239.80
Total Equity: 3,748.80 5,652.70 2,802.50 2,524.80 2,404.70
Explain Equity and Debt structure in detail
WACC
See what is the proportion of debt :
equity from slide 28 for all 5 years
and explain it as different structure
here.
Annual cashflow – is the earnings
before interest and tax (EBIT) and
you can show it with tax and
without tax calculation- in response
to the theories
All the best from your teacher
With lots of love and prayers for you to do well
Anu Jossan