CASE STUDY – SUNRISE PLC You are the financial manager of Sunrise plc, a UK-base
ID: 2731137 • Letter: C
Question
CASE STUDY – SUNRISE PLC
You are the financial manager of Sunrise plc, a UK-based company. The company’s last three years’ results are set out below.
Income Statement Year Ended 31 December
2007 2008 2009
£000 £000 £000
Sales 2,008 2,010 2,012
Cost of sales (1,406) (1,306) (1,509)
Gross profit 602 704 503
Expenses (474) (584) (417)
Profit before interest & taxation 128 120 86
Interest (13) (22) (20)
Taxation (23) (19) (13)
Profit for the year 92 79 53
Balance Sheet as at 31 December
2007 2008 2009
£000 £000 £000
Assets
Non-current assets
Property, plant, and equipment 660 780 878
Current assets
Inventory 27 45 68
Trade receivables 121 130 134
Cash 30 21 9
178 196 211
Total assets 838 976 1089
Liabilities
Current liabilities (trade payables) (111) (126) (210)
Non-current liabilities (120) (130) (150)
Total liabilities (231) (256) (360)
Net assets 607 720 729
Equity
Ordinary share capital (£1 each) 250 300 300
Preference share capital (£1 each) 88 100 100
Share premium account 12 25 25
Retained earnings 257 295 304
Total equity 607 720 729
Dividends paid
Preference dividends 8 9 9
Ordinary dividends 27 32 35
Share price £1.07 £1.05 £0.95
Part A:
You are required to prepare a report to the directors of Sunrise plc. The report should include:
1. Calculate the appropriate ratios which you think may help you to analyse the last three years’ financial results for Sunrise. (20%)
2. Comment, interpret, and critically evaluate Sunrise’s business performance in the last three years based on the calculated ratios. (20%)
Part B:
Sunrise is currently making investment appraisals of two potential long-term projects, X and Y. Both projects require the same initial investment of £2m. The following ratios have been calculated for the projects.
Ratios Project X Project Y
Payback period (years) 4 5
Accounting Rate of Return (ARR %) 15 20
Net Present Value (NPV £m) 120 145
Internal Rate of Return (IRR %) 16 13
You are, by using any relevant information and calculated ratios from Part A, required to provide recommendations to the directors of Sunrise for a choice of either project X or project Y. Sunrise is not able to undertake the above two projects at the same time or a mixed project of X and Y. (30%)
Part C:
By using any relevant information provided in Part A and Part B, explain and critically evaluate:
Main sources of finance which are available for Sunrise to finance the chosen project in Part B, and (15%)
Major budgeting techniques which can be recommended to support the running of the chosen project successfully. (15%)
Explanation / Answer
2007 2008 2009 gross profit ratio 0.2998008 0.35024876 0.25 there is decrease in gross profit due to increase in cost of goods sold net profit ratio 0.04581673 0.03930348 0.02634195 there is decrease in net profits due to increase in non operating expeses current ratio 1.6036036 1.55555556 1.0047619 there is almost decline in current ratio and it in much lower than the standard ratio of 2:1 inventory turnover ratio 71.7142857 44.6666667 29.5882353 it is decreasing its good return on assets 0.1097852 0.08094262 0.06036446 return in assets are decreasing overall performance of sunrise is decreasing major profitability ratios are decreasing and working efficiency is going down, liquidity position of company is also not very good.As things are evidenced from the above calculated ratio B x y payback period 4 5 ARR 15 20 NPV 120 145 IRR 16 13 IT IS CLEAR FROM THE GIVEN RESULTS FROM VARIOUS TECHNIQUES OF CAPITAL BUDGETING THAT CONTRADICTORY RESULTS ARE GIVEN BY VARIOUS TECHNIQUES AS Pay back period is favoring project X and ARR is favoring project Y. same NPV is suggessting project Y and IRR is suggessting project X so in this situation where NPV and IRR give conflicting results than it would be better to go with NPV method and as well as profitability is decreasing so ARR of 20% would be beneficial for increasing profitability Part C sunrise is not utilized debt in its capital structure so it would be better to include debt content in its capital structure and reduce the cost of capital this will also increase the profitability of the company NPV would be the most appropriate technique of capital budgeting as IRR is given conflicting results
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