Financial Decision Making, 2011/12 1

STAFFORDSHIRE UNIVERSITY BUSINESS SCHOOL

Hand in location: (tick as appropriate) LONDON STAFFORD

Module Name: Financial Decision Making
Module Code: BSP50035-6
Module Leader: Arman Farakish
Weighting: 100%
Checked by: Ahmad Mlouk

Submission Time and Date: Monday 9
th
January 2012 by 13:00 hours

Important Note: In addition to the normal submission via the Business
Schools Reception, you are required to submit your assignment through
TurnItIn.

You should hand in one copy of your assignment by the time and date above
to the appropriate hand-in location at the London SAM Receptions. Fill in the
Business School front cover (staple together with your assignment). This must be
date stamped. MAKE SURE that you fill in all the relevant details on this form (these
are given above!). One copy of the front sheet, date stamped, will be returned to you
by the Office. This is your receipt, keep it. You can submit work by post, but you
must send it recorded delivery, it must be postmarked two days before the deadline
date and a copy must be kept by you in case it is lost in the post. Faxed
assignments will not be accepted.
In essence, if you fail to submit any assessment for a module you will be
given a Grade Point N (Fail due to non-submission) for that module and you will no
longer have a guaranteed re-sit entitlement. Any further attempt entitlement will be
at the discretion of the Award Board. This regulation applies to all undergraduate
and postgraduate awards and at all levels. The regulation change has been
incorporated into the Universitys published academic regulations available on the
website at the following links.

Undergraduate awards:
http://www.staffs.ac.uk/assets/ugrad_mod_fram_tcm44-26763.pdf

Postgraduate awards:
http://www.staffs.ac.uk/assets/postgrad_regs_tcm44-26797.pdf
Assignments must be submitted by the due date. The only circumstance in which
assignments can be submitted late is if an extenuating circumstances form is
submitted. In these circumstances work may be submitted up to 2 weeks late only
(this is not automatic). If the extenuating circumstances are upheld, the assignment
will be graded, otherwise a 0 will be awarded.

Maximum Word Length: 2,500 words
State the number of words used at the end of your assignment. You may include
diagrams, figures etc. without word penalty. A sliding scale of penalties for excess
length will be imposed according to the amount by which the limit has been
exceeded.

1-10% excess no penalty
11-20% excess 10% reduction in the mark
21-30% excess 20% reduction in the mark
31%+ excess the work will be capped at a pass i.e. 40% or grade
point 4.

Financial Decision Making, 2011/12 2
NB. None of the above penalties will be used to change a student mark which is
above the pass mark, to one that is below the pass mark. Therefore the maximum
penalty for exceeding the word limit will be a reduction to a pass grade.
This assignment will assess learning outcomes:

1. Y 2. Y 3. Y


Ethics Disclaimer:
I confirm that the Universitys guidelines for ethical approval have been consulted
and that all ethical issues and implications in relation to the above project have been
considered. I confirm that ethical approval need not be sought.


Name/Signature of Module Leader: Date:


Learning Outcomes Assessed:

LO1: Understand the role of financial management in the performance of
organisations and critically appraise alternative sources of finance for
business firms
LO2: Critically analyse the financial position and performance of organisations
using key ratios
LO3: Apply advanced decision-making techniques in a range of short term and
long term situations


Diagrams, figures, tables, numerical analysis, footnotes, reference list and
bibliography are not included in the word count.

Assessment Criteria:
Pass:
For a pass mark, the examiner will expect you to apply appropriate methods and
techniques with some analysis of results obtained.

Distinction:
For a distinction, you will need to show depth of understanding of both concepts
and details, clarity of exposition and excellence in judging alternatives. Your
arguments must be supported by a range of references from the relevant body of
literature.
Financial Decision Making, 2011/12 3
Plagiarism Warning
Summary

Plagiarism occurs if you use somebody else's work in an assignment or
exam answer, but fail to state where you got the material from.
It can happen in any type of assessment where you are given the
questions or tasks in advance.
If another student uses your work in their answer(s), both you and they will
be punished when caught.
Punishments for committing plagiarism can be very severe.
25-30 students get caught in the Business school every year.
The details
Plagiarism is a form of cheating in which students use the work of others and
present it as their own. The University publishes a fully detailed description of what
the term plagiarism means on the Universitys main web-site under the heading
Procedures for dealing with suspected cases of academic dishonesty. We strongly
recommend that you go and read the full document at the above address.
Meanwhile, here is an extract of some of the relevant content. You will have
committed plagiarism and may be caught, reported and punished (as described
below) if you:
Copy extensively from the work of others (from sources such as books,
magazines, journals, web-sites for example) and submit the work as your own.
NB It is acceptable to refer to the work of others as long as you do not use too
much, and reference your sources properly. If you do not know how to do this,
please follow the guidelines given in the document entitled Adding quotations
and references to your written work at this web-site address:
http://www.staffs.ac.uk/schools/business/bsadmin/staff/s3/jamr.htm
Copy another students work and submit it for assessment under your own
name.
Allow another student to copy your work and they then submit it for assessment
under their name

This last item is of particular importance; few students seem to understand what it
means. If, for example, you allow another student to borrow your work and they
subsequently copy some that work and present it as their own, you and they will
both be punished even though someone else copied your work.

The risks of working with other students
Some assessment tasks are explicitly designed for group work, and it will be made
clear that a group answer is expected from you. All other tasks are intended as an
assessment of your individual comprehension and performance, and group answers
are not permitted. In individually assessed forms of assessment your work must be
different from that of every other student. Plagiarism can occur in assignments and
any examination where the questions are issued to students in advance. In both
cases it is possible for you to ask other people about how best to answer the
questions or complete the necessary tasks
You should be aware that different modules and subjects may have different
requirements. In some subjects, answers to questions may, for example, require
every student on a module to employ or refer to the same diagram(s), concepts and
the like in order to construct an acceptable answer. You should note, however, that
even in these circumstances your explanations of what the diagrams mean, and any
other writing referring to any common diagrams and concepts should all be in your
own words. Moreover, the situation may be very different on other modules, where
the submission of work that has a very similar structure, or the use of very similar
materials such as concepts, diagrams, quotations and the like, to that of another
student, may lead to you being accused of plagiarism.
Financial Decision Making, 2011/12 4

The picture is complicated and, unfortunately, it is not possible to give advice that is
directly relevant to every module you study. If you are unsure about how to avoid
plagiarism in any specific module, then rather than hoping and guessing, you should
ask for guidance from the member of staff who delivers that module.

Our overall advice is straightforward; by all means discuss how best to answer
questions or complete tasks with your colleagues, but when it comes to actually
writing your answers - DO IT ALONE!

What happens if you get caught?

Contrary to some student rumours, getting caught and being punished for
committing plagiarism is not an extremely unusual student offence. The Business
School typically uncovers and reports for disciplinary action 25 to 30 students each
year for plagiarism

Examination Boards may punish offending students in any manner that they deem
fit. Typical punishments Boards may choose range from reducing grades, making
students re-sit modules, through to failing students on a module or an entire award.
The University regards this form of cheating as a serious offence. Full details of the
range of likely punishments can be found on the Universitys web-site under the
heading Procedures for dealing with suspected cases of academic dishonesty.

Please consider yourself warned!



Financial Decision Making, 2011/12 5
LUDLOW ELECTRONICS PLC

Ludlow Electronics PLC is a well-established, listed, Leeds-based UK company
with sites throughout the north of England, engaged in the sourcing and distribution
of small branded consumer electronic goods.
The companys financial year end is 30
th
November and extracts from the Profit &
Loss Accounts and Balance Sheets of the company are shown below:

Profit & Loss Accounts m 2010/11 2009/10
Turnover 545.0 515.0
Cost of Sales (340.0) (330.0)
Gross Profit 205.0 185.0
Operating Expenses (125.0) (100.0)
Profit before Interest and Tax 80.0 85.0
Interest Payable (12.0) (9.0)
Profit before Tax 68.0 76.0
Corporation Tax (30%) (20.4) (22.8)
Profit after Taxation 47.6 53.2
Dividends (30.0) (30.0)
Retained Profit for Year 17.6 23.2

Balance Sheets m m m
Fixed Assets
Land & buildings 93.5 72.2
Plant & equipment 65.5 55.0
Goodwill 20.0 25.0
179.0 152.2

Current Assets
Stock 64.8 68.0
Debtors 106.2 92.0
Short term investments 23.0 7.0
Cash at bank 5.0 2.0
Total Current Assets 199.0 169.0

Creditors due within one year
Creditors 62.5 54.0
Bank Overdraft 15.5 15.4
Loans 15.0 8.0
Lease liabilities 8.0 7.0
Corporation Tax 20.4 22.8
Total Current Liabilities 121.4 107.2

Net Current Assets 77.6 61.8

Total Assets Less Current
Liabilities 256.6 214.0

Creditors due after one year
Loans 60.0 35.0
Lease liabilities 15.0 15.0

Net Assets 181.6 164.0

Capital and Reserves
Ordinary Share Capital 50.0 50.0
Share Premium 89.0 89.0
Retained Profit 42.6 25.0
Shareholders' Funds 181.6 164.0
Financial Decision Making, 2011/12 6
The nominal value of the shares is 0.25 each and the market value of the shares at
30
th
November 2010 was 3.25, a reduction of 0.35 compared to that at the
previous year end.
The long term loans are secured on the companys land and buildings.
In the consumer electronics sector, typical gross margins are around 34%, net
margins 16% and return on capital employed 33%. Ludlow Electronics main
competitor currently has a P/E ratio of 15 and a dividend yield of 4.5%.
Average working capital ratios in the industry are:
Stock holding 60 days
Debtors outstanding 70 days
Creditors outstanding 65 days

The company now wishes to expand its activities into the remainder of the UK
market and needs to raise an additional 85 million to finance this planned growth.
The current market share price is 3.45 per share and Ludlow Electronics advisors
have suggested either:
a) a rights issue at 2.95 per share or
b) the issue of convertible bonds at par, carrying a coupon rate of 9% per
annum, redeemable in 8 years time. Prior to redemption, the bonds may be
converted into ordinary shares at any time at a rate of 24 ordinary shares per
100 nominal value of bond stock.

The companys plans for 2011/2012 indicate a profit before interest and tax of 87
million and a further increase to 115 million in 2012/2013 when the benefits of the
proposed investment are expected to be realised. Dividends are expected to be
maintained going forward at the same rate per share as for 2010/11 and the rate of
Corporation Tax is assumed to remain unchanged at 30%.

Financial Decision Making, 2011/12 7
Required
(a) Calculate the key financial ratios for Ludlow Electronics PLC for both 2010/11
and 2009/10. Your selection of ratios should ensure measurement of the
companys performance in each of the following categories:
Profitability 4 ratios
Activity 5 ratios
Capital Gearing 4 ratios
Liquidity 2 ratios
Investor 6 ratios (23%)
(b) Based on your assessment on the key financial ratios that you have calculated
for both years and other available information, critically appraise the
performance of the company and suggest ways in which financial performance
could be improved. (30%)
(c) If it is decided to raise the additional funds by a rights issue, based on the
information provided, calculate:
1. the number of new ordinary shares to be issued
2. the theoretical ex-rights price
3. the value of the rights per one new share (5%)
(d) If it is decided to raise the additional funds by the issue of convertible bonds,
calculate the conversion price for the bonds and also the conversion premium at
the date of issue based on the information provided. (3%)
(e) Using projections, critically evaluate each of the alternative proposed methods
of raising the additional finance, referred to in c) and d) above, taking into
account the impact that the funding methods will have on the key profitability
and gearing ratios of the company in 2011/12 and 2012/13. (29%)
(f) Critically assess the services that an investment bank could provide to Ludlow
Electronics in connection with the raising of additional finance. (10%)

It is important that you research the relevant topics and cite appropriate literature to
support your analysis, arguments and evaluations. This will be reflected in the
marking.