Financial Analysis Assignment Sample

1: Introduction

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The concept of capital markets deals with evaluating the different aspects of buying and selling financial securities. The notion of capital markets deals with evaluating the entire process of financing activities. The capital markets deal with the trading process related to financial securities. The different types of financial securities like bonds and stocks get traded in the capital markets. The investment process in the capital markets deals with the fund allocation which would be beneficial for an investor. The investment process in the capital market takes place between the investors and the suppliers. The investor must analyze the risks associated with the investment before investing in any financial securities. 

2: Estimation of WACC

“Calculation of WACC”
Particulars	Formula	Amount(
Total debt	(Number of bond*face value)	1000
Total equity	(Number of shares*trade price)	8000
Interest Expense	(Rate of interest*debt)	120
Tax Rate	Given	10%
Risk free return	Assumed	1.50%
Beta	Assumed	1.2
Market return	Assumed	4.00%
Total Capital	(Total equity + Total debt)	9000
Weightage of debt	(Total debt/Total capital)	0.11
Cost of debt	(Interest Expense/Total debt)	12%
Weightage of equity	(Total equity/Total capital)	0.89
Cost of equity	Risk-Free return + Beta * (Market Return – Risk-free Return)	3%

Table 1: Calculation of WACC

(Source: self-made)

“Calculation of WACC”
Particulars	Formula	Amount
Weightage of equity	(Total equity/Total capital)	0.89
Cost of equity	Risk-Free return + Beta * (Market Return – Risk-free Return)	3%
Weightage of debt	(Total debt/Total capital)	0.11
Cost of debt	(Interest Expense/Total debt)	12%
(1-tax rate)	10%	0.9
WACC	“Weightage of Equity * Cost of Equity + Weightage of Debt * Cost of Debt * (1 – Tax Rate)”	4%

Table 2: Calculation of WACC

(Source: self-made)

For the calculation purpose of WACC the risk-free return was assumed to be 1.5%, the beta value was assumed to be 1.2% and market return was assumed to be 4%. The estimated weighted average cost of capital is nearly about 4% of the company (Vartiainen et al. 2020). The aspect of WACC could be determined as a financial domain for the company which would help to analyze the financial performance of the company. 

3: Estimation of cash flows

“Cash flow forecast of ManeSalah plc”
“For the year ended 2021”
Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Cash inflows
Sales Revenues	80	86.4	93.3	100.8
Investment	550	400	700
Total cash inflows	550	400	780	86.4	93.312	100.8
Cash outflows
Cost of goods sold	50	53.5	57.245	61.2522
Staff cost	15	16.5	18.15	19.965
Advertising cost	4	5	6	7
Total cash outflows	69	75	81.395	88.2172
Less: Tax	8	8.64	9.33	10.0777
Cash flow after tax	61	66.36	72.0638	78.1395
Total cash flow	550	400	719	20.04	21.2482	22.6375

Table 3: Cash flow Forecast

(Source: self-made)

The findings and analysis of the project have helped to gather informative data regarding the cost of the project. The immediate investment in the project is nearly about 700 million. The cash outflow of the project is 1650 million and the total cash inflow of the project is 1432.48. The net cash inflow of the project is 550 for the first year and 400 for the second as there were no other cash flows in the first year and second year (Jhoansyah, 2021). The net cash flow for the third year is 719 and 20.04 for the fourth year. The net cash inflow for the fifth year is 21.24 and for the sixth year, the net cash inflow is 22.63. The informative data in the cash flow statement would help to analyze the liquidity position of the company (Packard, 2019). The liquidity aspect of the project could be identified with the help of a cash flow statement. The cash flow statement of the company would help to identify the cash balance of the business (Laird & Venables, 2017). The effective management of the cash flow will help to provide the managing directors with a detailed insight on whether opening the stores will be beneficial or not. The cash flow for the seventh year and the year thereafter will remain the same as in year six. 

4: Project Appraisal Analysis

The aspect of project appraisal analysis would help to analyze the situational activities of the project. The positive aspects and the negative aspects of the project of opening 100 stores will be evaluated in this project. Analysis of proceeding with the project plan could be described as project appraisal analysis (Tsakiris, Safiolea & Tsakiris, 2017). The component of financial analysis has been used here to evaluate the efficiency of the project. The informative data regarding project appraisal analysis would help to get an idea regarding the estimated cost of the project report. The technique of NPV has been used to evaluate the segment of project appraisal analysis. Since the calculation of NPV showed a negative result, the project would incur a loss. The negative result of NPV indicates that the project would incur a loss which would not be beneficial for the company. 

The project of opening 100 Firmino stores in the UK by ManeSalah Company is expected to run in loss as the calculation of NPV is showing a negative result. The company must open 100 stores before pursuing the project plan (Götzmann & Bainton, 2021). The technique of Internal Rate of Return would be used as a project appraisal analysis which would be beneficial for the company. Implementing the internal rate of return technique would help to identify the time value of money within which the invested amount could be recovered from the project. 

5: Expected NPV and standard deviation

NPV	Amount	Discounting rate @10%	Discounted Cash Flow (a*b)
Cost of Firmino Project	£ 1,530
Immediate investment	700	£ 700.00
Further investment at year 1	550	0.909	£ 499.95
Further investment at year 2	400	0.826	£ 330.40
10% Discount Rate Table	Discounted cash outflow	£ 1,530
Cash inflows for five years:
Year 1	0.909	£ 550.00	£ 499.95
Year 2	0.826	£ 700.00	£ 578.20
Year 3	0.751	£ 419.00	£ 314.67
Year 4	0.683	£ 20.04	£ 13.69
Year 5	0.621	£ 21.25	£ 13.20
Year 6	0.564	£ 22.64	£ 12.77
Discounted cash inflow	£ 1,432
Formula of Net Present Value	(Discounted cash inflow-Discounted cash outflow)
Discounted cash inflow	£ 1,432.47
Discounted cash outflow	£ 1,530.35
Net Present Value	-£ 97.88

Table 4: Calculation of NPV

(Source: self-made)

Calculation of Standard Deviation of the NPV
for the year ended 2021
Inflow	Outflow
£ 499.95	£ 550.00
£ 578.20	£ 700.00
£ 314.67	£ 419.00
£ 13.69	£ 20.04
£ 13.20	£ 21.25
£ 12.77	£ 22.64
Standard Deviation (NPV)	273

Table 5: Standard Deviation of the NPV

(Source: self-made)

The NPV of the project is showing a negative result of -97.88. This negative result indicates that the company must not pursue the project as it might generate loss instead of generating profitable margins. The resulting output of the standard deviation of the project is nearly about 273. The NPV of the project has been calculated based on the cash inflow and the cash outflow of the project. The company might face various risks in the project while pursuing the project plan. The different aspects of the project must be evaluated by the management of ManeSalah plc before pursuing the project plan. 

6: Recommendations

It is recommended that the company must reject the project of opening 100 new stores in the supermarket. The project manager must use the non-monetary factors to evaluate the financial prospects of the project. Negative value of NPV indicates that there would be loss in the project which would not be advantageous for the company (Fragawealth.com, 2022). The Board must examine the thought of opening 5% stores rather than opening 100 stores in the UK. Hence, the project owner needs to think about the losses and returns before investing in this project. Beside this, the owner can accept the project at their own risk if they want better return in the long period of the above investment (Cfainstitute.org, 2022). The owner must think about the financial risk factors before proceeding with the project plan. It would be recommended that the owner must implement effective strategic actions to mitigate the risk factors before proceeding with the project plan. The project plan of company must expand its territory after implementing effective project plan strategies (Jhoansyah, 2021). The company must critically evaluate the financial factors before pursuing the plan of opening 100 stores in the U.K.

7: Conclusion

This report is concluded by stating that the risk factors of the Firmino project of opening 100 stores would not be profitable for Mane Salah plc Company. The directors of the company must analyze the internal environment and the external environment of the project before proceeding with the project. The company must think of evaluating the negative aspects before establishing the plan of the project. The investment strategy of the project is not so effective. The company must implement an effective investment strategy to evaluate the beneficial and the non-beneficial factors. ManeSalah plc Company must remain positive with the project at their own risk.

Reference List

Journals

Götzmann, N., & Bainton, N. (2021). Embedding gender-responsive approaches in impact assessment and management. Impact Assessment and Project Appraisal, 39(3), 171-182. Retrieved from: https://www.tandfonline.com/doi/pdf/10.1080/14615517.2021.1904721[Retrieved on 9/4/22]

Jhoansyah, D. (2021). Analyze Return on Equity and Weighted Average Cost of Capital Linkages to Firm Value. Almana: Jurnal Manajemen dan Bisnis, 5(1), 1-6. Retrieved from:https://journalfeb.unla.ac.id/index.php/almana/article/download/1411/967[Retrieved on 9/4/22]

Laird, J. J., & Venables, A. J. (2017). Transport investment and economic performance: A framework for project appraisal. Transport policy, 56, 1-11. Retrieved from: https://ora.ox.ac.uk/objects/uuid:8281d2a7-c8e8-4d44-9be1-4fa598f7e90a/download_file?safe_filename=Laird%2Band%2BVenables%2B%25282017%2529%2BTP.pdf&file_format=application%2Fpdf&type_of_work=Journal+article[Retrieved on 9/4/22]

Packard, P. C. (2019). Project appraisal for development administration. In Project appraisal for development administration. De Gruyter Mouton. Retrieved from: https://www.degruyter.com/document/doi/10.1515/9783111345062/pdf[Retrieved on 9/4/22]

Packard, P. C. (2019). Project appraisal for development administration. In Project appraisal for development administration. De Gruyter Mouton. Retrieved from: https://www.um.edu.mt/library/oar/bitstream/123456789/39945/1/Non-economic%20Characteristics%20for%20the%20Accounting%20in%20Projects%E2%80%99%20Appraisal.pdf[Retrieved on 9/4/22]

Tsakiris, G., Safiolea, E., & Tsakiris, V. (2017). On the economic appraisal of water utility projects in the framework of cohesion policy 2014–2020. Water Utility Journal, 15, 81-90. Retrieved from: https://www.researchgate.net/profile/Vasileios-Kaisar-Tsakiris/publication/323838253_On_the_economic_appraisal_of_water_utility_projects_in_the_framework_of_cohesion_policy_2014-2020/links/5aaeaedf458515ecebe96fa3/On-the-economic-appraisal-of-water-utility-projects-in-the-framework-of-cohesion-policy-2014-2020.pdf [Retrieved on 9/4/22]

Vartiainen, E., Masson, G., Breyer, C., Moser, D., & Román Medina, E. (2020). Impact of weighted average cost of capital, capital expenditure, and other parameters on future utility?scale PV levelised cost of electricity. Progress in photovoltaics: research and applications, 28(6), 439-453. Retrieved from: https://onlinelibrary.wiley.com/doi/pdf/10.1002/pip.3189 [Retrieved on 9/4/22]

Websites

Cfainstitute.org, (2022), Capital Markets, Retrieved from: https://www.cfainstitute.org/-/media/documents/support/programs/investment-foundations/15-the-functioning-of-financial-markets.ashx [Retrieved on 9/4/22]

Fragawealth.com, (2022), Investment Process, Retrieved from: https://www.fragawealth.com/investment-process [Retrieved on 9/4/22]