FINANCIAL MANAGEMENT AND CONTROL

Student Name: Nishant Goyal

Student Id: 179189724

Module Code: PGBM01

Module Name: Financial Management and Control

Module Tutor: Azmat Firdous

PGBM01-Financial Management and control 1

Table of Contents
Part A............................................................................................................................................................. 3
Evaluation report on the performance of Zurich Plc:................................................................................ 3
Different types of ratios: ........................................................................................................................... 3
Limitations of the ratio analysis: ........................................................................................................... 7
Part B............................................................................................................................................................. 9
Investment appraisal techniques and recommendations: .............................................................................. 9
Various investment appraisal techniques: ............................................................................................... 12
Sources of funds:................................................................................................................................. 14
Biblography: ............................................................................................................................................... 15

PGBM01-Financial Management and control 2

Part A

Zurich Plc
Evaluation report on the performance of Zurich Plc:

Ratio analysis: The ratio analysis is that technique of analysis which analyzes the
various aspects of any investment and project to be undertaken. It studies the trends of
any organization that what the flow of performance any organization have in past and
now. Like to check the past profitability, we have profitability ratios which analyze that
how much profitable business was and what and how change is there in profitability in
recent times.

Different types of ratios:

a. Liquidity ratios: These are the ratios which check the liquidity position of the
business and helps in making the decisions about raising the short term long term
finance. The capability of the business to pay back its short and long term debts is
judged by these ratios. The various types of ratios have been calculated below.

b. Gearing ratios: These ratios are used to check the leverage position of the business.
The leverage means using of more and more debt. So how much any organization is
dependent upon debt finance, is judged through gearing ratios. The ratio between the
debt & equity and between debt & fixed assets is found out.

c. Profitability ratios: The ratios which measure the change in the gross profit, net
profit and other operating profit are known as profitability ratios. The main aim of
these ratios is to 1st analyze the ratio of profit to the net sales and then the 2nd aim is to
compare the profits of present with the past profits to measure the changes.

d. Asset utilization ratios: The capital employed in the business contributes to the
revenue generation of the business. The main aim of these ratios is to analyze the
contribution of the current, fixed and total assets to the sales etc. It calculates that
how much better use of the assets has been made. Better is the ratio, better is use
made.

PGBM01-Financial Management and control 3

e. Investor’s potential: For calculating the return for the investors and how much they
potential for making the future investments is judged by these ratios. If they have
better EPS and better return this time, then there potential to invest in the future is
more and vice a versa.

2015 2016
Ratios

Liquidity Ratios

Current Ratio= (Current 6503/4701= 1.38 7006/2410= 2.90

Assets/Current Liabilities)

Quick Assets ratio= (Quick

Assets/Current Liabilities) (6503-1543)/4701= 1.05 (7006-1320)/2410=
2.35

Quick Assets= Current Assets-

Stock-Preliminary Expenses

Gearing Ratios

Debt to Equity Ratio= 7120/12410= 0.57 5292/12410= 0.42

(Debt/Equity)

Debt Ratio= (Total Debt/Total 7120/27528= 0.25 5292/24927= 0.21

Assets)

Equity Ratio=(Equity/Assets) 12410/27528= 0.45 12410/24927= 0.49

Profitability Ratios

PGBM01-Financial Management and control 4

 Gross Profit Ratio= (G.P./Net (7382/18920)*100= 39% (5825/16243)*100=
Sales) * 100 35%

Net Profit ratio=(N.P./Net (479.16/18920)*100= (280.83/16243)*100=

Sales)*100 2.53% 1.72%

Operating Ratio={(Cost of goods [(11538 + [(10418 +

sold + Operating Expenses)/(Net 4800)/18920]*100= 4042)/16243]*100=
Sales)}*100 86.35% 89.02%

Operating Profit Ratio= (Operating (2582/18920)*100= (1783/16243)*100=

Profit/Net Sales)*100 13.64% 10.97%

Assets Utilization Ratios

Fixed Asset Turnover Ratio= (Net 18920/25726= 0.73 16243/20331.60= 0.79

Sales/Fixed Assets)

Current Assets Turnover Ratio= 18920/6503= 2.90 16243/7006= 2.31

(Net sales/ Current Assets)

Assets turnover Ratio= (Net sales/ 18920/27528= 0.68 16243/24927= 0.65

Total Assets)

Inventory Turnover Ratio= (Cost (12780)/[(1543+ (11273)/[(1320+

of Goods Sold/ Average Stock) 1242)/2]= 9.17 Times 855)/2]= 10.36
Times

Inventory Conversion Period= 365/9.17= 31 Days 365/10.36= 35 Days

365/ Inventory Turnover Ratio

Investor Potential Ratios

PGBM01-Financial Management and control 5

 Return on (472.84/12410)*100= (70.17/12410)*100=
Investment=(EAT/Equity)*100 3.81% 0.56%

Earnings per Share= (EAT/No. of 472.84/12410= 0.038 70.17/12410= 0.0056

Equity Shares)

a. The Liquidity position of the Zurich PLC has improved a lot in 2016 than 2015. The
standard Current Ratio should be 2:1, which was only 1.38:1 in 2015. But this
improved in 2016 and increases to 2.9:1, which is satisfactory. These improvements
in the current ratio are because of the increase in the current assets and meanwhile
decrease in the current liabilities. In quick ratio, the standard quick ratio is always
1:1. It was 1.05:1 in 2015, which was good but it become more satisfactory in 2016,
increases to 2.35:1. Again, the improvement in the quick ratio is also because of the
increase in the quick assets and decrease in the current liabilities. This shows good
improvement in the liquidity position of the Zurich PLC.

b. Gearing ratios are showing the low leverage position of the Zurich PLC. The
organization is very much dependent upon the equity capital than on fixed capital.
The standard or preferred ratio of Debt to Equity is 2:1. But it is only 0.57 in 2015
and become much lower in 2016 i.e. 0.42. Also the Debt to Assets is lower too. It was
0.25 in 2015 and become even lower in 2016 to 0.21. The reason of the lower debt-
equity ratio and debt ratio is less use of debt. The decrease in the both these ratios
show that Zurich has decreased the debt in the 2016 than in 2015. Equity to assets
ratio is more than debt to assets in both the years. Equity to Assets ratio is 0.45 in
2015 and 0.49 in 2016. So all these three ratios are showing that Zurich PLC is more
dependent upon equity than debt. This is the indicator of low leverage position in
2016 than in 2015, of the organization.

c. The profitability position of the Zurich has shown the dis-improvement in the year
2016. The Gross profit and the net profit ratio have decreased from 39% to 35% and
2.53% to 1.72% respectively. The main reason of this is the decrease in the gross
profit and the net profit. And the reason of the decrease in the gross profit and net
profit is decrease in the sales of the organization in 2016. The cost of goods sold and
the operating expenses of the organization have shown decrease but because of the
decrease in the sales too, the operating ratio has shown increase from approx... 86%
to 89%. However there has been increase in the operating profit has been recorded in
the year 2016. But the overall profitability position of the organization has decreased.

PGBM01-Financial Management and control 6

 d. Contribution of the fixed assets to sales has increased in percentage. However there is
decrease in the fixed assets and the sales, but the assets has decreased more than the
sales, that’s why the ratio has gone up slightly. However, there has been increase in
the current assets in 2016 but it doesn’t help in increase in the sales. Despite of
increase, the sales has gone down with increase in the current assets. So the
contribution of the current assets in the sales is very poor in 2016 than in 2015. On
the basis of both current and fixed asset’s contribution to sales, the contribution of the
overall assets to the sales has decreased from 0.68 to 0.65; the main reason of it is the
decrease in the sales. The inventory turnover ratio has increased from 9.17 times to
10.36 times, which is good. However, the bad part is the conversion period of the
inventory, which has increased from 31 days to 35 days now. So the overall
utilisation of the organization, if compared to 2015, is bad in 2016.

e. Just because of the fall in the earnings after tax and interest, the return on the
investment and the EPS of the organization has shown the downfall. The return on the
investment in 2015 was 3.81% but it is 0.56% in 2016. In the same way, the EPS
decreases from 0.038 in 2015 to 0.0056 in 2016. So the investment potential of the
investors has decreased in the year 2016 than in the 2015.

Limitations of the ratio analysis:

a. False results: If the data provided for the ratio analysis is incorrect, then there will be
false results. Like if the inflated value or the depreciated value of the assets is not
entered into financial statements then that will provide false results. The
undervaluation of the assets will definitely provide undervalued results. So the
concrete results are not guaranteed.

b. No considerations of the probable happenings: In ratio analysis, the past data is

analyzed. But the future uncertainties are completely ignored. Like as said above, the
inflation of the value of assets is ignored, so when calculation is done, we have some
idea of happening in the future on the basis of the past data. But the change in the
value of assets will change the course of that happening too.

c. Different methods of accounting: If the comparison is done for the number of years
or between two or more firms, and if the accounting methods applied are different for
those different years or different for all firms, then results may vary and no true
comparison is possible. Like one firm is using other method of measuring the income

PGBM01-Financial Management and control 7

 of the organization and the other one has different method, so there might be slight
difference in the scale of the measurement.

d. Change of price: In the market, if the level of the price changes then the value of the
assets etc. will also vary. So the results may not be true. Ratio analysis ignores the
price level changes. Increase in the prices, not noticed, will under valuate the assets
etc. and decrease in the prices will over valuate the things.

e. Fractional information only: The ratio analysis provide only fractional information,
so if the decisions are to be taken then the other methods of analysis are to be used
with ratios. However there are some of the ratios which provide results in percentage
too, but still other tools needed to be used.

f. Ignorance of quality factors: In the ratios, the quantitative data is used. But the
qualitative data of the firm or business is ignored. So it doesn’t provide the true
information for the decision making. Like for the valuation of goodwill, there is no
provision in ratio analysis or consideration to the goodwill is not given in the ratio
analysis. ( Learn Accounting: Notes, Procedures, Problems and Solutions, 2018)

PGBM01-Financial Management and control 8

Part B

Johnson ltd
Investment appraisal techniques and recommendations:

a. Payback period: It is that period in which investment made will return in the form of
income. Payback period calculation is done to compare two more investment options.
The higher is the PBP, higher is the risk and vice a versa.

Formula for PBP: (In value of £)

Payback period= (Cost of investment)/ (Annual net cash flows)

= 2,000,000/ (1,220,000-350,000)
=2,000,000/ 870,000=2.298 Years= 2 years and 109 days

As the asset is to be depreciated fully in the coming six years but the return will be
given by it in just 2 years and 100+ days only. So on the basis of PBP method, the
investment option looks economical. (Study.com, 2018)

b. The discounted Payback period: In the payback period method, the time value of
the money is ignored. So for removing that thing, the discounted payback period is
used. This method considers the discounted value of the future cash inflows in present
and helps in decisions making of the choosing of an investment.

Formula of DPBP: (value in £)

Discounted cash inflow= Actual cash inflow/ (1+i)n

i= discount rate (say 11 percent in this question)
n= period of cash inflow

Discounted payback period= A+ (B/C)

A= last period having negative cumulative cash inflow

B= cumulative discounted absolute value at the end of A period
C= during period A, discounted cash flow.

PGBM01-Financial Management and control 9

 Calculation

Year Cash flow PV factor Disc. Cash Cumulative

PV £1= Flow Cash flow
1/(1+.11)n
0 -2,000,000 1 -2,000,000 -2,000,000
1 1,220,000 0.9009 1,099,098 -900,902
2 1,220,000 0.8116 990,152 89,250
3 1,220,000 0.7312 892,064 981,314
4 1,220,000 0.6587 803,614 1,784,928
5 1,220,000 0.5935 724,070 2,508,998
6 1,220,000 0.5346 652,212 3,161,210

DPBP= 1+ ‫׀‬-900,902‫׀‬/1,099,098= 1.81= 1 Year and 299 days

So as per the calculation done in the DPBP method, the payback period is even shorter i.e.
1 year and 299 days. After that period, the asset will start giving the profit only. On the
basis of this, the decision for making the decision of the investment looks positive. It has
great economic feasibility.

c. Accounting rate of return method: This is the method which shows the ratio
between the accounting profit and the average investment made for the project. It is
one of the investment appraisal techniques, used to check the feasibility of the project.

Formula for the ARR: (in value of £)

ARR= Avg. Accounting Profit/ Avg. Investment or Initial Investment

Annual Depreciation= (Initial Investment- Scrap Value)/ Useful Life
= (2,000,000 –500,000) / 6 = 250,000

Avg. Accounting Income= Annual cash inflow- Annual depreciation

= 1,220,000-250,000 = 970,000

ARR= Avg. Accounting Income/ Initial income

= (970,000/ 2,000,000) * 100= 48.5%

PGBM01-Financial Management and control 10

 The investment option given here has very good accounting rate of return. This shows
the profitability of the investment. On the basis of the calculated ARR, decisions can
be made (Accounting explained,2018)

d. Net present value: The NPV of any investment is the change in the value of the
wealth of the investor. The NPV method equalizes the net cash inflows which are less
than the initial investment.

Formula of NPV: (in value of £)

NPV= {R * {[1-(1+i)-n]/i}}-Initial Investment

R= net annual cash inflow

i= rate of return (say 12% in this ques.)
n= no. of years (6 in this ques.)

NPV= {1,220,000 * {[1-(1+0.12)-6]/0.12}} – 2,000,000

= {1,220,000 * {[0.97]/0.12}}-2,000,000
= {1,220,000 * {8.08}}-2,000,000
= {9,861,666.666}-2,000,000
= 7,861,666.666

The NPV of the cash inflows shown by the method is very much satisfactory. This
shows the economic feasibility of the project for the organization. So the offered
investment plan can be implemented.(Accounting explained,2018)

e. Internal rate of return: This is the method which equalizes the NPV of the
investment with the initial investment. IRR is the discount rate which makes the NPV
of investment zero.

Formula of IRR: (in value of £)

[CF1/ (1+r) 1 + CF2/ (1+r) 2+ CF3/ (1+r) 3+…..] – Initial Investment = 0

r= discounted rate of return or IRR(expected is 20%)

CF= net cash flow of various periods

PGBM01-Financial Management and control 11

 [1,220,000/(1+ r)1+ 1,220,000/(1+r)2+…...1,220,000/(1+0.r)6] – Initial Investment = 0

a. At 20% IRR, NPV-Initial Investment = 2,057,122.31, which doesn’t satisfy the

equation of NPV-Initial Investment =0

b. At 55% IRR, NPV-Initial Investment = 58,223.43, which doesn’t satisfy the

equation of NPV-Initial Investment =0

c. At 60% IRR, NPV-Initial Investment = -87,862.8 which doesn’t satisfy the

equation of NPV-Initial Investment =0

d. At 56% IRR, NPV-Initial Investment = 27,415.82, which doesn’t satisfy the

equation of NPV-Initial Investment =0 but it is most nearest to zero value. So the
565 is the IRR of the project

Therefore, IRR from the above calculation= 56%

Since, the IRR is more than expected, therefore the investment option is much
profitable and the economic feasibility of the project is high too. So this project or
investment option should be chosen.(Accounting explained,2018)

Various investment appraisal techniques:

a. Payback period:

Merits: This is one of the simple methods to be applied. Also the solution provided by
it is based on quick evaluation. The formula used is universal, so it can be used by
anyone and by any business.

Limitations: However it ignores the time factor of the value and it also consider the
cash returns only. This is the drawback. The consideration to the time should be given
because if with the time, any price level changes or any other change may take place
that will not be considered for the valuation.

b. Discounted payback period:

Merits: This method considers the time value of the money. Also the risk factor is
considered in it. So the value of anything in future is considered in present.

PGBM01-Financial Management and control 12

 Limitations: But the increase of firm’s value is not ensured by it. Beyond the
discounted period, the cash flows are ignored. So any increase or decrease after that
period, will leads to undervalued and overvalued results only.(connectus,2018)

c. Net present value:

Merits: This method tells whether firm will have increase in value or not. The time
value of the money and all the cash flows are considered in it. When all the cash
flows are considered, we have true net flow of cash, which helps in providing the
realistic results.

Limitations: But the main limitation is that it requires estimation of the cost of the
capital. Also the expression is made in dollars not in percentage. So if the right
estimation is not easy to make or not possible for the manager to make, then it may
provide different results. The results so provided might be wrong one too.
d. Internal Rate of Return:

Merits: It also tells that whether firm will increase in value. The risk factor, all cash
flows and time value of the money is considered.So this is one of the best tools of
investment appraisal techniques. This considers everything almost. So the results
provided by this tool are even more realistic.

Limitations: But it also requires the cost of capital for making the decisions. Also if
the cash flows of the project changes, that will also create a problem. As cost of
capital in the initial stages of the business is not easy to measure, so that will be the
problematic situation for the business.

e. Accounting rate of return:

Merits: It is simple easy. The consideration to the total profits and savings of the
entire economic life is given. The comparison between two or more projects is
possible to make. Due consideration to depreciation is also given in it.

Limitations: However, if different methods like IRR and ARR are applied by
different firms or in different years, then the results of the Accounting Rate of Return
method will vary. It also not considers the cash inflows of the business. (Money
Matters | All Management Articles, 2018)

PGBM01-Financial Management and control 13

Sources of funds:

a. Smart leases: The leasing of the fixed assets can be done. It will save the cash of the
business which is required for the purpose of the working capital. However the cost
of the lease may be an issue. It is generally higher than bank. In lease, the assets are
taken on like on rent for time period, generally for the period of one year. In some
cases for many years too. And in return the business has to pay the considerations for
the lease. Those considerations are known as lease rentals. In this system, sometimes
the cost of repairs and other expenses are to be bear by the owner or sometimes by the
lessee or user.

b. Bank loans: Banks provide debt loans to the business. So the funds can be raised
from here too. However the liquidity of the business is the main concern for the
business. If the liquidity is there, then only bank provide loan. For advancing loans,
bank will 1st check the payback capability of the business. If the business has the
capacity to pay back the loan on time, then only they will get it. Also the use of the
loan may also be tracked by the bank. As bank has full concern of their money, so
they will keep track of the loan amount.

c. Share capital: New funds can be raised by issuing of the share capital too. This is the
safest of all methods. However, ownership sharing is to be done if the equity capital
is raised. There are other methods of issuing share capital too. That is preference
capital. This type of capital bear fixed rate of dividend and get preferences over the
equity holders. However no share of the ownership is given to the preference
shareholders.

d. Venture capital: Venture capital is provided for starting up a new business project.
This is done for the risky projects mainly. So the risk of the firm is covered here.
However, equity ownership is to be given to the venture capital firm. Also, venture
capital is not for all, it is especially for the technology driven projects only. The main
advantage of venture capital is that covers the risky projects for which other equity
shareholder are not ready. However the main concern of the venture capital providing
firm is that they want the project having new technology. They mostly prefer the new
ideas of the business. And it is also done for the new startup projects only.

e. Retained earnings: The surplus of the business is also like glucose to the business. If
the business had surplus last year, they would have retained it. So they can use it in
this year for financing the project. Retained earnings have the great advantage that
there is no need to raise new capital or raise new loans from the bank. There is no
need to make any type of liquidity or risk analysis of the projects if they really want

PGBM01-Financial Management and control 14

 to do it. They have the retained earnings, and it is their own money, so they can use it
anyway. However, retained profits decrease the share of income of the shareholders
of the firm.

So, all these are some of the sources of the funds for the investment to be made.
There might be other options too. But these are one of the best options. Every option
has some of the limitations but advantages are more than the limitations. So the
business can raise funds from these sources. There are some sources in which
business has to measure the liquidity position and the risk factor of the project.
However there are some sources, in which such analysis is not done by the outer
parties. Sources like equity, in this ownership have to be shared.
However source might be any, but it provides the start to the project and provide the
scope of growth for the business. (forbes.com, 2018)

Biblography:

1. Learn Accounting: Notes, Procedures, Problems and Solutions. (2018). 9

Major Limitations of Ratio Analysis. [online] Available at:
http://www.accountingnotes.net/cost-accounting/ratio-analysis/9-major-
limitations-of-ratio-analysis/6247 [Accessed 21 June. 2018].
2. Study.com. (2018). How to Calculate Payback Period: Method & Formula -
Video & Lesson Transcript | Study.com. [online] Available at:
https://study.com/academy/lesson/how-to-calculate-payback-period-method-
formula.html [Accessed 21 Jun. 2018].
3. Accounting explained. (2018). Discounted Payback period. [online]
Available at: https://accountingexplained.com/managerial/caital-
budgeting/discounted-payback-period [ Accessed 22 june.2018]
4. Accounting explained. (2018). Discounted Payback period. [online]
Available at: https://accountingexplained.com/managerial/caital-
budgeting/npv [ Accessed 22 june.2018]
5. Accounting explained. (2018). Discounted Payback period. [online]
Available at: https://accountingexplained.com/managerial/caital-
budgeting/irr [ Accessed 22 june.2018]
6. Drake, P. (2018). Advantage and disadvantage of the different capital
budgeting [online] educ.jmu.edu. Available at:
http://educ.jmu.edu/~drakepp/principles/module6/advdistable.pdf [Accessed
23 jun. 2018].

PGBM01-Financial Management and control 15

7. ConnectUS. (2018). 3 Advantages and Disadvantages of Payback Period
Method. [online] Available at: https://connectusfund.org/3-advantages-and-
disadvantages-of-payback-period-method [Accessed 24 Jun. 2018].
8. Money Matters | All Management Articles. (2018). Accounting Rate of Return
(ARR) Method | Advantages | Disadvantages. [online] Available at:
https://accountlearning.com/accounting-rate-of-return-method-advantages-
disadvantages/ [Accessed 24 Jun. 2018].
9. Forbes.com. (2018). Source of Funds. [online] Available at:
https://www.forbes.com/2010/07/06/best-funding-sources-for-small-business-
entrepreneurs-finance-dileep-rao.html#60aeb9f47152 [Accessed 25 Jun. 2018].

PGBM01-Financial Management and control 16