M004LON Coursework 2 April 2016.Individual coursework Contributes 60% of total marks.CASE STUDY MADISON PLCStudents are required to submit an individual report before the deadline with a maximum of 2500words based on the following case study. You will also be required to make a 5 to 6 Minutespresentation as summary of your report in week 10 just before submission. You will be requiredto send your presentation slides to your Tutor a day before presentation. The slides should not bemore than 6.CASE STUDY MADISON PLCMadison plc is a public limited company, whose shares are quoted on the Alternative investmentMarket in London and has been operation in the UK for the past 10 years. Madison plc providesintellectual property to Oil and gas companies, HR consultants, Marketing companies, Touristcompanies and investment property funds all over the UK. For the past 10 years, Madison plc hasbeen a profit making firm as it has retained its previous clients, in addition to capturing an increasingshare of the market. However, the Finance director of Madison has recently engaged your firm tohelp them source Finance for their expansion plans.New SoftwareThe current software product that Madison has been selling to companies is now deemed to beoutdated and the company is looking to invest in a new product, and there are two proposals onoffer. The details of these two proposals are outlined below.Madison SuperMadison super is the first of the two proposals. The expected life of this product is 5 years and itsworking capital requirements and the cost of new software, expected revenue, components costand overheads are as below:Madison Super Draft Figures ? 000Year 0 1 2 3 4 5New Software Cost 5,500Working Capital 400 550 700 850 1,000Sales Revenue 5,500 6,500 7,700 8,750 9,800Less:Component A (670) (800) (950) (1,100) (1,350)Component B (1,070) (1,500) (1,800) (2,100) (1,800)Overheads (275) (325) (385) (438) (490)2All of the above estimates have been prepared in terms of present day cost and prices. Assume thatcash flows arise at the end of each period. In addition??£ Revenues, overheads and working capital are expected to rise by 3% per year from year 1.??£ The cost of component A and component B are expected to rise in line with inflation of 4%per year from year 1.??£ The cost of senior technology officers, who have come from the US have not been taken intoconsideration in the forecast and are as follows: Senior Technology Officer 1: Will be paid ?200 per hour and expected number of hoursfor STO 1 are 1,470. The rate paid is expected to rise in line with inflation at 4% per yearfrom year 2 and the number of hours is expected to reduce by 2% per year, every yearfrom year 2 onwards.Senior Technology Officer 2: Will be paid ?100 per hour and expected number of hours forSTO 2 are 1, 700. The rate paid is expected to rise in line with inflation at 4% per year fromyear 2 and the number of hours is expected to reduce by 3% per year, every year from year2 onwards.Depreciation is straight line over the life of the software, and the software is not expected to haveany salvage value at the end of year 5. The company gets an annual capital allowance of 25%.Corporation tax is 33% and any tax benefit or tax expense is settled one year in arrears. Ignoredepreciation when calculating corporation tax payable/receivable, but take the capital allowancesinto account.If Madison plc invests in Madison Super then the discount rate that would be required to assess theNPV would be 14%.3Madison Platform:Madison Platform is the second of two proposals, the expected life of this software will also be 5years and its working capital requirements, the cost of the new software, expected revenue,components cost and overheads are as follows:Madison Platform Draft Figures ? 000Year 0 1 2 3 4 5New Software Cost 8,500Working Capital 500 653 806 959 1,112Sales 6,200 7,564 9,001 10,531 12,006Less:Component A (341) (529) (810) (1,053) (1,441)Component B (1,320) (1,875) (2,250) (2,723) (2,945)Overheads (186) (227) (270) (316) (360)All of the above estimates have also been prepared in terms of present day costs and prices. Assumethat the cash flows arise at the end of each period. In addition, you will need to take the costs ofsenior technology officers and capital allowances, inflation and the rise in the revenue, overheadsand working capital into consideration, which are the same for the Madison Super.Corporation tax rate is 33%, and tax benefit or tax expense is steeled one year in arrears.If Madison plc invests in Madison platform then the discount rate that would be required to assessthe NPV would be 13%.New Company AcquisitionMadison plc is also considering to grow its operations across continental Europe, and at the momentthere are two potential target companies that can help Madison plc in creating a presence in Europe,Puteaux digital France and Melia Portfolio Research Spain. For the purpose of this analysis, assumethat the required investment funds will be provided by way of a capital loan from the parent entityor other sources of finance; however Madison plc is willing to acquire only one of the companies.The data for the past three years is given below:4 2011 2012 2013 2011 2012 2013Turnover 9,406 10,812 11,516 15,529 17,849 20,516Administrative Expenses (7,012) (7,643) (8,102) (16,926) (19,455) (22,362)Operating profit/ (loss) 2,394 3,169 3,414 (1,398) (1,606) (1,846)Interest receivable and similar income 12 14 32 30 34 39Interest payable and similar charges (39) (44) (26) (19) (22) (26)Profit/ (Loss) on ordinary activities 2,368 3,138 3,421 (1,387) (1,595) (1,833)Tax (710) (942) (1,026)Net profit/(Loss) 1,658 2,197 2,395 (1,387) (1,595) (1,833)Fixed AssetsIntangible fixed assets 4,720 5,426 3,577 3,235 3,718 4,274Tangible fixed assets 1,458 1,676 2,250 5,785 6,649 7,6436,179 7,102 5,827 9,020 10,368 11,917Current assetsDebtors: amounts falling due aftermore than one year 467 536 409 579 666 765Debtors: amounts falling due withinone year 2,679 3,080 6,322 3,847 4,422 5,083Cash at bank and in hand 732 842 1,599 1,298 1,350 1,404Creditors: amounts falling due 3,879 4,457 8,330 5,724 6,438 7,252within one year (2,184) (1,490) (1,693) (9,834) (13,490) (17,687)Net current assets/(liabilities) 1,695 2,967 6,637 (4,110) (7,052) (10,435)Total assets less current liabilities 7,873 10,069 12,464 4,910 3,315 1,482Net assets/ (liabilities) 7,873 10,069 12,464 4,910 3,315 1,482Capital and reservesCalled up share capital ( ?1 nominalshares) 100 100 100 450 450 450Share premium account 1,805 1,805 1,805Capital redemption reserve 2 2 2Profit and loss account 5,965 8,162 10,557 4,460 2,865 1,032Shareholder s funds/(deficit) 7,873 10,069 12,464 4,910 3,315 1,482Puteaux France ? 000 Melia Spain ? 0005Required:Draft a report to the Finance Director of Madison plc, in which you:(1) Provide an explanation on the different sources of funding the company can have and theiradvantages and disadvantages and make recommendations as to how the company can manage thesame to help in the planned expansion program. [20 marks](2) Comment and provide recommendations on how efficient working capital management canimprove a firm s cash flows? [5 marks](3) Analyse the two Investment proposals by using NPV and provide recommendations. You shouldalso briefly comment on other investment proposal techniques that Madison may use, and thelimitations of using those techniques. If Madison plc has capital rationing problems where it has only ?5.5 million of funds available for the new investment, suggest which software the company shouldopt for. Use IRR to support your decision and assume that the second rate of NPV as 10% for theMadison Super Software and 11% for the Madison Platform Software. [20 marks](4) You would also be required to explain how the company can use Break-even analysis as a tool toaid them in making a decision as to which software to produce. You will be required to come upwith an example with your own numbers and draw up a break-even chart in explaining the same[10 marks](4) What other factors may a firm take into account when making investment decisions? [10 marks](5) Based on the information provided and to the extent possible, perform ratio analysis and makerecommendations as to which company they should be looking to invest ?n. What other informationwill help you in making an informed decision on ratio analysis. [10 marks](6) Presentation of your work (summary key is the NPV computation and decisions made) (15marks)Clearly state any assumptions that you makeTotal marks: 90Individual CourseworkThis is individual coursework which contributes 60% to the overall module mark.SubmissionThis assignment must be submitted by 9.00 a.m. on the deadline day via Turnitin. Word limit(excluding tables, charts, references and appendices): 2,500 words6Style and FormatStyle : ReportFont size : 12 (preferably Arial)Line spacing : 1.5 linesReferences : Harvard styleLearning outcomes being assessed:1. Understand the different sources of funding/ finance.2. Making use of different appraisal techniques and ratio analysis in making Investment decisions.Assessment criteria(i) Detailed explanation of sources of finance with academic reference 20%(ii) Efficient working capital management 5%(iii) Investment appraisal 20%(iv) Other factors to consider when making investment decisions 10%(v) Breakeven analysis 10 %(v) Ratio analysis 10%(vi) Presentation 15%(vii) Professional format 10%Total 100%PLAGIARISM WARNING! ?Assignments should not be copied in part or in whole from any othersource, except for any marked up quotations, that clearly distinguish what has been quoted fromyour own work. All references used must be given, and the specific page number used should alsobe given for any direct quotations, which should be in inverted commas. Students found copyingfrom the Internet or other sources will get zero marks and may be excluded from the university.Word Count Any work submitted with more than 2500 words will be have 15 marks deducted.The presentationThe allocation of marks will be based on the Assessment Rubrics for the Regular Assignment.Location: Room TBCTime slots arrangements: TBCPlease note that you should arrive in good time before your session starts. Students who areabsent or late will receive a zero mark.