Financial Management

Last date of submission is 10th sep 2010

3200 to 3500 words (Time new roman, Font size 12, Headings Size 14 Bold)

Plagiarism is 20% allowed.

Financial Management:

Strategic Management and Leadership (7DI)

Unit Code: L7FM7003

Unit Name FINANCIAL MANAGEMENT

MODULE ASSIGNMENT
ASSIGNMENT DEADLINE: BY 10 SEPTEMBER, 2010

WORD COUNT: WRITE BETWEEN 3,000 AND 3,500 WORDS

APPENDIX ALL YOUR CALCULATIONS

MODULE LEADER: STEPHEN BERCHIE

In your presentation bear in mind the following core criteria must be covered at all times:

 Analysing financial data;

 Assessing budgets based on financial data to support organisation’s objectives;
 Evaluating financial proposals for expenditure submitted by others.

In addition you are expected to write a reflective statement of no more that 300 words (not countable
towards total number of words), describing the value and knowledge gained from undertaking the
assignment.
 Section 1

GlaxoSmithKline Plc is UK-based pharmaceutical, biological, and healthcare company. GSK is

the world's fourth largest pharmaceutical company after Roche, Pfizer and Johnson & Johnson, by
revenue; and a research-based company with a wide portfolio of pharmaceutical products covering
anti-infectives, central nervous system, respiratory, gastro-intestinal/metabolic, oncology, and
vaccines products. It also has a Consumer Healthcare operation comprising leading oral healthcare
products, nutritional drinks, and over the counter medicines. It is listed on the London Stock
Exchange and is a constituent of the FTSE 100 Index . The company’s financial year ends on 31
March. The final accounts of the company for the 2010 financial year are as follows:

Income Statement for the year ended 31 March 2010

£m £m

Revenue 400

Cost of sales (200)

Gross profit 200

Expenses:

Selling and distribution 50

Research expenses 20

Administration (interest £15) 30 (100)

Operating profit before taxation 100

Taxation (30)

Profit available for shareholders 70

Preference dividends (10 %) 9

Ordinary dividends 21 (30)

Retained Earnings 40

Statement of Financial Position as at 31 March 2010

£m £m £m
Non-current Assets

Intangible Assets

Goodwill 90

Trade Marks 20

Patents 40 150

Tangible Assets

Land and Building 200

Property, Plant and

Equipment 100

Fixtures and fittings 100 400

550

Current Assets

Inventories 120

Trade Receivables 80

Cash and cash equivalents 40 240

Current Liabilities

Payables 100

Proposed dividends and tax 20 (120) 120

Net current Assets 670

Non-current Liabilities

Long-term creditors 140

Total Net Assets 530

Equity and Reserves

Ordinary Share Capital (150m £2) 300

Share premium 10

Preference Share Capital (90m £1) 90

Reserves

Retained Earnings (01/04/2009) 90

Revaluation reserves 10

Retained Earnings 40 130

Total Equity and Reserves 530

The market price of the ordinary shares was £4.00

The following data relates to the industry:

Industry norms

Profitability: Return on capital employed 26%

Gross profit Margin 47%

Net profit margin 25%

Expense to revenue ratio 27%

Liquidity : Liquidity ratio 2:1

Acid test ratio 1:1

Efficiency: Trade receivable collection period 60 days

Payable collection period 130 days

Assets turnover ratio 1.20 times

Inventories turnover ratio 2.4 times

Investment: Earnings per share 16.67p

Price earning(P/E) ratio 16.82

Dividend cover 5.1 times

Dividend yield 4.1p

Gearing : Debt to equity 26.8% or 50%

Interest cover 9.2 times

REQIURED: Using the financial data provided above, answer the following
questions in a report format:

Q1 The preparation of financial information for decision making by the management of

GlaxoSmithKline Plc require the use of valid and reliable financial data:
 (a) Explain what you understand by ‘valid and reliable financial data’ distinguishing
between internal and external sources from which the management of
GlaxoSmithKline Plc could obtain its financial data with appropriate examples;

(b) State and explain the indicators that can influence validity and reliability of the
available sources from which GlaxoSmithKline Plc could obtain its financial data;

(c) The financial authority levels in GlaxoSmithKline Plc include both internal audit
and external audit positions. Explain the functions of the internal auditor and the
external auditor emphasising how their functions impact on the validity and
reliability of the financial data and reports of GlaxoSmithKline Plc.

Q2 The performance of an organisation can be measured and analysed by using different

methods and techniques. Identify and explain the different types of techniques for
measuring the performance of GlaxoSmithKline Plc

Q3 There are different types of financial tools and techniques used for analysing the
financial performance of an organisation and notable among them are financial ratios:

(a) Using financial ratios analyse the financial performance of GlaxoSmithKline Plc
over the financial year in line with the industry standards, suggesting strategic
measures for the management of GlaxoSmithKline Plc in addressing any areas of
concern;

(b) Mention and describe in detail all the stakeholders who will be interested in
GlaxoSmithKline Plc’s financial information and explain their respective financial
information needs;

(c) Identify and explain the components of the Annual Reports that the management
of GlaxoSmithKline Plc will present in an annual general meeting of the
company.

Q4 Countries and accounting standard setters encourage all public limited companies
(PLC) world wide to use common accounting standards for financial statement
preparation. Critically review how useful an IFRS (International Financial Reporting
Standards) and FASB (Financial Accounting Standard Board) can help
GlaxoSmithKline Plc to maintain its existence in Japan.

SECTION 2
GlaxoSmithKline has decided to operate in Japan. The company will produce and sell two different
products- Miracure (M) and Rotarix (R). The following data is available for the construction of
budgets for the next six months;

(a) All the values are converted to Great British pounds. The data below relates to the budgeted
quantities to be sold for the seven months period commencing October.

September October November December January February March

Miracure 1800 2400 2600 2800 3100 3000 3150

Rotarix 1600 2300 2560 2750 3200 3200 3250

The selling price of Miracure is to be £4 each and £6 to Rotarix in September. The prices are
expected to rise by 10% and 20% each month for Miracure and Rotarix respectively. Sales budget is
the limiting factor.

 The closing stock for each product will equal 40% of the sales value.
 Opening stock values for Miracure and Rotarix are £1200 and £1100 respectively.
 The anticipated hours for Miracure and Rotarix are 800 and 900 respectively for each month.
These figures are to be split equally for skilled and unskilled labours.
 It’s agreed that skilled labour force will attract £30 an hour while unskilled labour gets £15 an
hour.
 The opening trade receivables are estimated to be £2800(September £1700, August £1100)
 The receivables will pay two months in arrears.
 There is an opening trade payable of £4900 (£1000 July, £1800 August, £2100 September)
 Creditors will be paid three months in arrears.
 Credit purchases will be £2400 in October rising by £500 per month until December and then
suffering a 12% decline in January and remaining constant thereafter.

Required
(1) Compare and contrast budgetary control from setting objective.

(2) Discuss the tools available for the preparation of budget and advice management which of the
tools is relevant for entering into Japan market.

(3) prepare the following budgets for six months beginning October;
(a) Sales budget
(b) Labour budget
(c) Trade receivables budget
(d) Trade payables budget
(e) Production budget
(b)The following budget information relates to a new product introduced in Japan during the
financial year ending 31 March, 2010:
Activity Standard Flexible Budget based Actual

Budget on actual production Results

Units sold 7000 7600 7600

Revenue £120000 £132000

Variable costs:

Direct materials £40000 £45500

Labour £30000 £34200

Variable overheads £21000 £26000

Total variable costs £91000 ` £106700

Contribution £29000 £26300

Fixed costs £23000 £25150

Operating income £6000 £1150

Required
(1) Analyse the above data finding out the exact standard quantity of actual production for the
period.
(2) Discuss the causes of the variances and offer directors the needed advice to improve the
performances.
SECTION 3

UK-based group GlaxoSmithKline is intending to acquire Cosmo Pharmaceutical in Japan worth of

£4.1million. The parent company intend using the subsidiary for 6 years after which Cosmo will be
sold for £1.5 million. GlaxoSmithKline’s cost of capital is 10%.

The following cash flows are expected to accrue to the GlaxoSmithKline for the period:

Grant from Japan government £500,000 available in year two. The company’s objective is to inject
£550,000 working capital in the first year. Revenue for year one will be £1, 800000 rising by 4 per
cent each year.

However, staff will cost £60,000 for the first and second year but it will increase by 3% thereafter.
Purchases of materials are expected to be £500,000 in year one. This will increase by 5% p.a.
Administration cost will remain £50,000 each year. Marketing director insisted that to penetrate in
Japan’s market the company has to spend £150,000 in year one, year two to four the cost will rise to
£250000 after that 2 per cent rise every year. Research and development cost of £350,000 rising by
3% each year is expected

Required: Write a report to the GlaxoSmithKline board;

(a) What benefits can net present value (NPV) bring to GlaxoSmithKline taking into account the
rationale of NPV?
(b) Compute net present value for Japan’s project and advise the board of directors the
implication thereof.
(c) The cost of capital is likely to change to 8%, recalculate the NPV and advise management if
going to Japan is worthwhile. What are the likely causes to the decrease of the cost of
capital?
(d) Develop the internal rate of return for the proposed action.
(e) Analyse the strategic implication for going to Japan