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Assignment Task
 

Task Summary: 
This assessment task is designed to evaluate student’s following skills and abilities:
Skills to forecast future financial resource needs.
Skills to analyse current asset performance and capacity.
Skills to set business targets and compliance mechanisms.
Skills to manage financial risk.
Skills to monitor compliance with financial projections

Part A
You have recently completed an Advanced Diploma of Accounting and been recruited to John Holland Australia. You have been asked to provide preliminary advice on whether John Holland should make an investment in Infra Structure Victoria. This is a large construction company that is proposing to build a rail tunnel between Melbourne City and regional centres in Victoria. The tunnel is scheduled to open in 2015.
The projected cash flow of the tunnel project:
Year $M
2010 -450
2011 -500
2012 -550
2013 -650
2014 -200
2015 200
2016 300
2017 320
2018 340
2019 360
2020 400
2021 400
Additional information:
Estimated market inflation = 2%
Domestic Risk-Free rate = 6%
Beta for tunnel projects = 1.3

Task 1
Undertake an analysis of the proposed tunnel project and advise on whether John Holland should invest in shares of Infra Structure Victoria. Relevant calculations must be shown using a spreadsheet. Use Analysis of the proposed tunnel project

Part B
You are the Senior Manager of Finance at BHP. Recently the company has been reviewing its corporate plan, which has had the maximising of shareholder wealth as its major goal.
The Managing Director thinks this single goal is inappropriate and asks his co-directors for their views on giving greater emphasis on the following:
a) Cash flow generation
b) Profitability as measured by profits after tax and return on investment
c) Risk-adjusted returns to shareholders
d) Performance improvement in several areas such as concern for the environment, employees' remuneration, quality of working conditions and customer satisfaction

Required:
Provide the Managing Director with a report for a presentation at the next board meeting which:
a) Evaluates the argument that maximisation of shareholder wealth should be the only objective of a company, and
b) Discusses the advantages and disadvantages of each of the Managing Director's suggestions about alternative goals.
c) Describe the negotiation process you would have with the Managing Director on suggested alternatives to the protentional impact on the business.
 

Part C
Sydney Water Services and Melbourne Water Services are two wholly owned subsidiaries of Midal Water. You are an accountant, and you have recently joined the finance team of Midal Water’s headquarters.
The finance director has also provided you with the following background information on the two companies.
Sydney Water Services
The company holds a license issued by the government to be the sole supplier of drinking water to a large town in Victoria. The business requires a considerable investment in infrastructure assets and is therefore highly capital intensive. To comply with the license, the company must demonstrate that it is maintaining the guaranteed service standards to its customers. Sydney Water Services is extensively regulated, requiring detailed annual returns concerning costs, prices, profits, and service delivery standards. The government enforces a price-capping regime and therefore the company has limited freedom in tariff determination – the government will normally only sanction a price increase following a demonstrable rise in costs.
Melbourne Water Services 
In contrast to Sydney Water Services, Melbourne Water Services operate in an extremely competitive market offering plumbing services to domestic properties. The business is experiencing the following.
Rapidly changing market conditions
A high rate of new entrants and business failures
Occasional shortages of skilled plumbers
Fluctuating profits
In addition to this background information, you also have the following.
Summarised income statements and statements of financial position (balance sheets) for the last two years for both companies
Service contract costing information from Melbourne water services
Notes from a meeting that you have had with the manager responsible for the profitability of the three service contracts offered by Melbourne water services
 
Sydney water services           
Summary income statement 2020
$m    2019
$m  
Revenue   31   30  
Less          
Staff cost  3   2    
General expenses 2   2    
Depreciation 12   9    
Interest 5   5    
    -22 -18       9 12              
Summary statement of financial position           
(balance sheet)- Sydney water services          
    2020   2019  
    $m   $m  
ASSETS          
Non-current asset   165   134  
Current Assets   5   6  
Total Assets    170   140  
          EQUITY AND LIABILITIES          
           
Equity          
Current Liabilities          
           
           
Melbourne Water services          
Summary income statement   2020   2019  
    $m   $m  
           
Revenue   20   35  
Less          
Staff costs 5 6     General expenses 10 10     Material 3 6     Depreciation 1 1         -19 -23   Profit   1 12         Summary statement of financial position      (balance sheet)- Melbourne Water services   2020 2019   ASSETS   $m $m   Non-current asset   23 22   Current Assets   12 12       35 34   EQUITY AND LIABILITIES           Equity   31 30   Current liabilities   4 4       35 34              
Melbourne Water Services          
Service contract costing data          
           
The company offers three service contracts: standard, super and economy.          
You have been provided with the following information.          
           
Standard Super   Economy
Budget demand for contracts   1000 800 2000 Raw material cost per contract   $100 $150 $80 Direct labour hours per contract ($10 per hour)   5 8 2            
 
Fixed overheads are allocated to the contracts at 150% of total direct costs.
The selling price is arrived at by adding 50% to the total costs.
Notes from the meeting
The manager states that his prime objective is to maximise the total profit that the three service contracts earn.
You discover that there is currently an unavoidable shortage of labour that has resulted in the available hours being limited to 80% of those originally planned in the budget.
The manager responds to the shortfall in labour hours by “concentrating sales on our most profitable service contracts, surely this is the obvious thing to do.”
The manager is provided with the fixed overhead figure (150% of direct costs) from the finance department and assumes that it remains “fixed” irrespective of the contract volume and contract mix. This overhead arises only because of operating the service contract business.
The manager would never knowingly “supply a service contract that did not cover the total cost, otherwise, the company's profits would decline.”
The manager estimates the volume of contracts for budgetary purposes and provides these figures to the Finance Department of Melbourne Water Services. You have compared his past estimates with the actual sales and conclude that he is fully accurate with the sales forecast – you can assume that the actual number of contracts sold for any of the three contract types will not be exceeded.

Required:
1.Prepare a spreadsheet and compare the financial performance of Sydney Water Services and Melbourne Water Services using the financial information above. Include your calculations of ROCE, Sales Margin, Asset Margin, Gearing Ratio and Current Ratio for comparison.
2.Your finance director is not satisfied with the performance of these two subsidiaries and has asked you to prepare a report covering the following issues;The profitability of the two subsidiaries. Use Template Comparison of the financial performance of Sydney Water Services and Melbourne Water Services 
The competence of the Melbourne water service manager to make financial decisions
The consequences of having a common management information system serving both companies
Use 450 – 500 words in your report.
 
Part D - Roleplay and Procurement policy 
Your Finance Director has asked you to provide a consultancy service to the newly appointed Profit Center manager responsible for the service contract business. Describe the advice you would give to assist the achievement of the financial target. Consider the following points,
The primary objective of the manager is to maximise the total profit that the three service contracts earn.
You discovered there is a shortage of labour (only 80% capacity could be utilised with the labour available)
The manager responded by looking more into profitable contract services only
The manager assumed the fixed overheads remained constant throughout the period
Recently Midal Water wants to expand its business and is looking for additional funds. The Procurement Policy states that the company should raise funds through equity rather than additional loans.
Critically review the principle of the policy and explain the benefit of gearing in capital structure during a role play. Your Trainer/Assessor will play the role of the recently appointed Profit Centre Manager and will ask for your view on the Procurement Policy for the additional fund. Explain your suggestions to them.
List the points that you want to discuss in an agenda before the meeting.
Conduct research and prepare a PowerPoint presentation explaining the cost and benefits of procurement of additional funds in terms of equity and debt.
Your Trainer/Assessor will play the role of the recently appointed Profit Centre Manager and will ask for your view on the Procurement Policy for the additional fund. The time for this role play will be 10minutes, your presentation is to be uploaded into canvas.

 

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  • Posted on : September 04th, 2019
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