2. Assessment Brief Introduction You are a management accountant for the Smiths Group Plc, a company listed on the London Stock Exchange. The following items are to be discussed at the next board meeting and the directors have asked you to write a report giving advice on the following areas. Nb: all areas should be answered.
2.1 Financial Analysis
a) A shareholder has raised concerns regarding the financial performance of the Group compared to its competitors and, specifically, that the Group is prioritising its employees’ pension fund at the expense of maximising shareholders’ wealth. Using the 2017-year end audited financial statements and any other relevant research, critically assess the financial and operating performance of the Smiths Group. Your assessment should draw comparison to competitor(s) and sector averages whilst also specifically addressing the shareholders’ pension concern.
All sources of information used in your analysis should be Harvard Referenced as per the General Assessment Advice above. 25 marks
b) Discuss and explain FOUR possible limitations on the usefulness of the above comparisons. 6 marks
2.2 Company Valuation
a) Using the financial statements used in part one as a basis, calculate the value of the Smiths Group. using the following methods:
• Asset-based valuation; • Dividend Valuation Model (using CAPM to estimate the required return to the shareholders); and • P/E ratio.
State any assumptions you make and include in your appendices any excel calculations. Your appendices should also include a spreadsheet of the formula’s used. 25 marks
b) Critically discuss the valuation methodologies used above and provide an argument for the amount you expect the Smith Group to be worth. 6 marks
2.3 Project Appraisal
a) The board is considering investment in new catheter manufacturing equipment that it hopes will reduce manufacturing costs and enhance Smith’s competitive position. With reference to the information contained in Appendix 1, calculate the Net Present Value (NPV) of the proposed investment and state whether the project should be undertaken. 20 marks
b) In the context of Discounted Cash Flows calculations, explain the treatment of the following transactions:
• Market research costs; • Depreciation. 3 marks
c) Calculate and critically analyse the IRR and Discounted Payback that you could have used to assess the project and comment on which one is the most appropriate to use in this case.
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