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Assigemt #2 steps 7 - 10

Jovan Pienaar

Blog link: https://jpaccounting.wordpress.com

Step 7:

The Cardiff Property PLC provides quite a few services in the process of operating a property investment firm. The three I have chosen are as follows:

1.) Housing/business Apartments – this is the main service in which the company provides, there are a wide range of properties/apartments to choose from and they all fluctuate in different prices. I chose one of the most affordable apartments for this step as they can get very expensive in the area which my company investments in.

2.) Property Investment Agents – Because the Cardiff Property PLC sells property they have to have property agents who take care of the estate being shown to customers. Property investment agents are also on the ground so to speak and tend to showcase the homes to buyers in way to showcase the maximum profit for the buyer’s investment. Property Agents working with The Cardiff Property PLC are not contracted by the company but rather hired, yet the agents are contracted to a other company and gains commission from sales and for giving advice. The hiring cost of these agents, I found online can be set between anywhere of £5,000 to £23,000 depending on how big the house or apartment is, where it is placed and what the current market is for the area. Because The Cardiff Property PLC is set in one of the more wealthiest of places the cost I would assume would have to be around the £15,000 mark.

3.) Display homes – as stated on the Cardiff Property PLC’s website the display homes are bought and owned by the company, presented by the property investment agents, the display homes have to be at top condition for buyers in order to see the full potential of the property area. Furniture is bought by the company presented in a neat manner, also lawn mowing services, cleaners and gardeners are hired to keep the presented area clean and tidy. The website for The Cardiff Property PLC does not acknowledge the price

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associated with the display homes, but I did find a website outlining the costs in which the services of lawn mowing, cleaners, garners will be. I found the cost of having a display home fully refurbished. I will not be including the price of buying the display homes outright as presented by the company’s website, I will only include the cost or services and refurbishments because I am already including the cost of the apartments for this step. Also, as I have later stated in my ratio analysis the company does not sell houses every day, some houses sit for two years at a time, so the cost for services will be calculated for two years.

After I researched these 3 services I have found the costs of services associated with the Apartment and the display homes, however the property investment agents cost was an assumption based on research because my company does not disclose this anywhere on their website. Therefore, the costs of the 3 services and products I have chosen from my company are as follows:

1.) Apartment in Alston House, Bracknell = £525,000

2.) Property investment agents = £15,455

3.) Display homes = £ 55,383

The variable cost percentage in regard to these three services are quite different to one another. The variable costs are the costs that are reliant on the level of the output of assembly. However, The Cardiff Property PLC operates as a service company and not a production orientated company, thus after an ample amount of research I found that the shared discord of fixed and variable costs differs between a service company and production company. For example, in a production firm, labour is a consistent variable cost which increases as the yield of product escalates. On the other hand, a service firm can categories labour as a fixed cost, as employees are placed under a wage or a salary. After extensively reviewing and digging information from The Cardiff Property PLC’s website and how the operate in the property investment field, I made a sophisticated estimation for each of the variable cost’s percentages for each of the services.

The variable cost percentage I have accredited to these three services are as follows:

1.) Apartment in Alston House, Bracknell = 50%

2.) Property investment agents = 70%

3.) Display homes = 40%

The variable costs of each service are as follows:

1.) Apartment in Alston House, Bracknell = 50% x £525,000 = £262,500

2.) Property investment agents = 70% x £15,455 = £10,818.50

3.) Display homes = 40% x £55,383 = £22,153.20

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Contribution Margin = (sales price) SP – (variable cost) VCThus, CM = SP – VC

1.) Apartment in Alston House, Bracknell = £525,000 – £262,500 = £262,500

2.) Property investment agents = £15,455 – £10,818.50 = £4,636.50

3.) Display homes = £55,383 – £22,153.20 = 33,229.80

Apartment in Alston House, Bracknell

Property Investment Agents Display Homes

Sales Price £525,000 £15,455 £55,383Variable Cost £262,500 £10,818.50 £22,153.20Contribution Margin £262,500 £4,636.50 £33,229.80Contribution Ratio 50% 30% 60%

Contribution Margin Discussion

To my interpretation, the contribution margin allows managers to control the quantity of products and services which are subsidised towards the fixed costs and then ultimately led towards profit. The first thing that can be noticed from the three services of The Cardiff Property PLC is that the contribution margin relating to each item are larger than zero, therefore it can be stated that the contribution margin is positively supporting the companies fixed costs and profit. Likewise, as seen in the above table the contribution margin fluctuates substantially between all three services. This fluctuation occurs because of the sales cost and variable costs being different to each item. For example, The Cardiff Property PLC’s cheapest apartment available is not very cheap at all, charging £525,000 for the entire apartment. This price however is due to where the apartment is situated because the Thames Valley area in the UK is a very high demand market for housing which makes living there quite expensive. The apartment is not just expensive because The Cardiff Property are forcing it to, the market controls the pricing of housing in the area, it is however a huge benefit to the company. On the other hand, the lowest price for service of the three is the price of hiring a Property Investment agent (£15,455). This service also being quite expensive is also due to the fact that the company is mainly based in the Thames Valley area, thus giving the property investment agents the chance to demand a higher hiring cost due to the price of property. Thus, it is not challenging to see the difference in the contribution margin between these three services.

There are some definite reasons as to why I believe The Cardiff Property PLC’s provided services have a different range of contribution margins. Firstly, to have a successful property investment company these three services have to be very prominent, as it portrays professionalism towards the property investors. Although display homes and hiring of property investment agents are not vital for a property investment company, it does certainly help in the overall growth of the company. It can be argued however that the display homes contribution margin will be somewhat the same compared to the chosen apartment for this step, as I did not include the cost of purchasing the property, I only included the refurbishments and services required to keep the display home in tip top condition. In saying

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this I would agree to some point of this argument that the contribution margin in comparison to these two services would be the same if I included the overall price of the display home. However, the display homes which I focused on where homes set in the suburban parts of the Thames valley area where massive acres of land consisting of lawn and gardens are present. The apartment which I had chosen is set in the busy streets and is a very small space to live in, where no acers of land is present, just a very small, but liveable space. Because of this I feel as if I was to compare the two with their full prices, the contribution margins would in fact be similar as the two properties’ will be very similar in cost as living in town is sometimes even more expensive than living in the rural areas of the Thames Valley area. Why? Because it is more convenient to live in an apartment a couple of blocks away from work rather than having to drive through the busy UK traffic every morning and then being late for work. The property investment agents on the other hand having the lowest contribution margin is one of the main reasons I believe as to why The Cardiff Property PLC is so successful. This service helps the company sell their product faster and more sufficiently as professionals are engaging with the investors face to face and showing the investors the perks of the property, with the ability to sell property more efficiently this ultimately increases the company’s profit each year.

Possible Constraints discussion

Because my company operates in the service industry they are confronted with a multitude of constrictions that have the ability to impact certain areas negatively and cause resource constraints for the firm. One of the biggest resource constraints I believe the Cardiff Property PLC faces, are the possible or already current damages to property. Many of the properties are placed in the thriving city and also suburban areas of the Thames Valley, which is always susceptible to damage from fires, weather and previous owners. Having a look at the ‘strategic report’ in the annual report of the firm, it states that there have been occasions in 2010 where fires have damaged properties and it was very expensive to fix such damages. Previous owners have also caused small amount of damages to the property, as would be expected, and some property were susceptible to flooding in the suburban areas. These constraints have effect on the future value of the property and thus it can affect future profit for the company.

Another resource constraint that has the possibility to impact The Cardiff Property PLC’s services is the establishment of new projects such as investing in new areas. This new investment may not prove as successful as the Thames Valley area and providing resources, time and money towards the new projects may backfire. The company is currently in the middle of deciding to invest in another area, however as evident in the annual report, the “possible risk and uncertainties” section states that the “Surrey” area which the company is interested in does not have a successful market as the Thames Valley. Therefore, the company needs to evaluate the costs associated in investing in a new area and if it will impact the resources negatively which will have an effect on the company’s profit.

Additionally, The Cardiff Property is not just obstructed through resource constraints however, the company is also constrained by the overall market situated in the Thames Valley area. The market will not keep increasing forever, it will reach its peak eventually which will either allow the market to plummet or to plateau. Another factor which can occur in the downfall of the market is oversaturation of investors and competitors which will deter other investors from the area and can have a negative impact on the company. To my

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understanding the market value for property is very unpredictable, anything can happen which can have drastic impact on the market. For example, Mackay’s market for property was thriving at the point of the mining boom, but know hundreds of houses are empty around Mackay and the market has plummeted. Thus, if something like this occurs for The Cardiff Property PLC it will affect profits, and resources negatively. Thus, it is extremely imperative for the company to consider the constraints when determining what services to provide to the customers. for instance, If the new project of investing in the “surrey” area goes forth, the services which relates to the selling/investing of property have to be evaluated very closely to gain the maximum benefit of sales. Mangers of the firm will have to be very strategic in how they decide what properties to purchase or invest in so that if the marketing the “surrey” area does increase the company will benefit form these decisions.

Step 8

Excel Ratio Spreadsheet link + entire financial/restated statements + NVP and IRR calculationshttps://jpaccounting.files.wordpress.com/2018/06/the-cardiff-property-spreadsheet-2018.xls

As I stepped into the calculations of ratios for The Cardiff Property PLC I was very curious as to how it works because the thought of calculating ratios of a firm had until now never crossed my mind before. But Being a nerd for maths and equations I was only left excited to get started and have a go. Having my knowledge increased by the chapter reflections where martin explains very important concepts and the help of peer wise I can see the effectiveness of the ratios being utilised. But before I even start my calculations I watched the recorded lectures by Maria Tyler and flowed the steps thoroughly to guarantee my calculated results are accurate, and to make sure I wasn’t applying any incorrect data in my spreadsheet. This help from Maria made live so much easier and completing the ratios took no time. I even posted my ratio spreadsheet on my blog to hopefully aid some of my peers and then in return some discussion of comparisons of different company’s performances can occur in chat forums.

Profitability ratios

Moving straight into the first set of ratios consisting of probability I found it quite simplistic to determine what items are to be applied when conducting the calculations of the return on assets (ROA) and the net profit margin. However, I was initially bamboozled when I came across my results as they were all over the place. But this initial confusion became clearer as I began to understand that because my company is a property investment firm, it does not sell their products or give their services to customers every day, realising this I understood the impacts it will have on calculating the ratios.

The net profit margins help to govern the quantity of revenue which is ultimately converted to profit when all the expenditures have been compensated for, and thus it demonstrates the relocation of sales into net income. Logically, a firm would be most concerned in achieving a high percentage ratio for this section as it conveys a successful profit-based business. This can be seen in figure 1.0 below as in the years between 2017 – 2014, The Cardiff Property PLC are producing a very large profit following the compensation of the expenditures. This is no surprise to me as I have done my research on my company and have discovered that each year the company’s overall profit is expected to increase as long as the market for the Thames Valley area (the region my company invests in) is at high demand. This can further be

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evaluated, for as presented in The Cardiff Property PLC’s annual reports the expenses are very diluted and stay placid throughout the years. Only profit is imminent in the annual report which is then conveyed in the profitability ratios, overall, I am happy to see this as it shows that my ratios calculations are somewhat correct as compared to my annual reports. As compared to my peer’s net profit margin calculations it is quite humorous to see that my company’s ratios are almost ten times larger than theirs. This doesn’t mean my company is bigger however as one of my peers I compared profit margins with has a firm which is associated with Coles which eludes to the fact that their company is ten times the size of mine. Yet my peers and I were quite confused initially as to why my profit margins are so large, I was expecting them to be big but couldn’t comprehend this size. But after doing some further research I came to the conclusion that in these four years my company has shot up in profit as the company is suddenly increasing with millions rather than thousands. This can be explained by looking at 2012’s annual report for the company as in this year the profit margin was considered to be normal but then as years moved on the market in which the company invests in suddenly skyrocketed in value (diagram below for example). I find this I interesting as this somewhat proves the idea that the stock market is very random, and it can’t be predicted.

Next is the ROA, being the ratio, which determines the amount of profit that is generated form the current assets. Again, I was not surprised seeing that the ROA for The Cardiff Property PLC was at a high percentage but what did surprise me was realising that the ratios aren’t as big as what id though it would be. Having a look at my financial statement and comparing the variance between the revenues and the total assets it can be seen that these ratios are correct, and the fact can be established that The Cardiff Property PLC are defiantly operating their assets very well and are generating a high a return each year. Once again as I looked upon my peers in class I saw that their companies had negative percentages which overall decreases their ROA ratios and produces less profit for that year. Many discussions took place and it did come to my attention my company’s success won’t last forever, for one day the market might change and the company’s profitability ratios could in fact begin to decrease.

Figure 1.0 The Cardiff Property PLC – Profitability ratios

Efficiency ratios

Heading into efficiency ratios for The Cardiff Property PLC I originally thought that these percentages will be a fantastic technique to analyse the effectiveness of a firm’s operations. It seems obvious to me that in the business world a company is continuously interested in profit, and how much of this profit they can attain for their investments or business endeavours. Yet the question arises as to how we can confirm that these investments are in fact efficient? To my interpretation, the efficiency ratios help formulates a measure of a firm’s contribution to utilise their current assets accurately whilst still skilfully managing the liabilities of the firm.

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Because my company operates in the service industry rather than the production industry, I was originally hesitant whether the company would actually have inventory in order to calculate the days of inventory ratios. This calculation corresponds to the amount of days it takes between the selling and buying of the inventories. Having viewed the balance sheet for my company I was surprised to see that there are in fact inventories present, only they aren’t labelled as inventories but rather labelled as ‘stock and work in progress’. This allowed me to consider the services that my company provides which is presented in step 7 (selling of apartments - Apartment in Alston House, Bracknell), that sells and invests in housing/apartments. However, it does not seem essential for my company to even require inventory items as they only prioritise in property, this can be evaluated however as it can be seen in the balance sheet my companies inventories (stock and work in progress) are the same for each year. I’m not 100% certain as to why this occurs each year but if I was to make an estimated guess I would assume that the company puts forward a small budget each year for any purchases of inventory to occur, such as new printers and office equipment.

As I head into the calculations of the efficiency ratios I was lucky to have found the ‘costs of goods sold’ with ease as I know that some of my peers couldn’t find theirs as easily for it was completely different. Following the calculating of the ratios I initially got a huge shock seeing that the ‘days of inventory’ are so large as displayed in figure 2.0 below. This relates to the time it takes for my company to purchase inventory and then is either applied to their services or are sold for a profit. As can be seen in figure 2.0 It is clear as day that my company has a humungous time delay for each year ‘days of inventory’, it took 4278 days in 2017 and almost doubled in 2015. Seeking help from my peers and frantically emailing lectures I luckily came to the realisation that it makes complete sense that it takes this long for inventory to be purchased, sold or applied. This is due to the fact that the company is a property investment firm, property or product is not being sold every day, it does take a while for the company to sell their properties to possible investors. Bare in mind however the average family in the UK cannot afford about 80% of the houses presented by The Cardiff Property PLC. Because of how expensive these properties are, it is clear that only the wealthy invest in these estates, that being said it is clear as to why days to inventory percentage is so high because the firm doesn’t need invest allot of time and efforts into inventory if they are not selling every day.

The next efficiency ratio to be analysed consist of the ‘total asset turnover ratio rate.’ To my understanding this ratio is useful in order to regulate how the firm is benefiting form generated sales composed from their assets. As can be seen in figure 2.0 The Cardiff Property PLC’s assets are colossal which shows how successful the company is. However, the question arises as to how the company has such a substantial amount of assets, yet they don’t sell property that often so how does the company generate the same stable assets year after year? My answer to this has to be that fact that the companies stock market is increasing each year because of the Thames valley area increasing the price of property as each year passes. This only benefits the company and they are able to sustain a low Total asset turnover ratio whilst the days of inventory is so large.

Figure 2.0 The Cardiff Property PLC – Efficiency Ratios

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Liquidity Ratio

The liquidity ratio didn’t really interest me or brought forward any new concepts or finding of my firm. The calculation equation being current assets/current liabilities only proves that The Cardiff Property PLC has the ability to turn its assets into cash in order to pay off the existing liabilities and other obligations. Unfortunately, as can be seen in the financial statements of the firm, liabilities are not as current as assets are, which allows the company to have a high liquidity ratio. As can be seen in figure 3.0 the liquidity ratio almost stays the same each year, staying above the 8.5 margin as almost no new liabilities of the firm occur. Thus, the liquidity ratios simply highlight the company’s capability to pay off short term debts without having to sell long term sales which produce assets. An estimated guess would be that these ratios will stay above the 8.5 ratio as long as the business is “booming” in the Thames Valley area.

Figure 3.0 The Cardiff Property PLC – Liquidity Ratio

Financial Structures Ratios

Similarly, to the liquidity ratios above I expected financial structures to be low for debt/equity and to be high for the equity/total assets, this is because my company only has assets, generating lots of cash flow and having minimal setbacks with debt or liabilities. The debt to equity ratio is a comparison of the total liabilities of a firm to the total equity financing. As can be seen in figure 4.0, the debt equity ratio, being very simplistic to calculate, I was correct in my assumption. However, I was left to wonder what the impacts for the frim would be if this low debt to equity ratio was flipped. So, before I started critically analysing this, I gazed upon my peer’s financial structure ratios and found that one of peers actually have a very high debt/equity ratio. Me and my peer engaged in a discussion together and researched what it means for a company to have a high or a low debt to equity ratio and compared the two. We learnt that a high debt to equity ratio signifies that a company obtains a large amount of funding from creditors and lenders rather than shareholders. However, a great quantity of debt is never a good sign and is contemplated by investors to be a sign risky business practices. As high debt to equity ratios have the probability to lead to bankruptcy as payments need to be continued even if financial downturn of the company occurs. On the other hand, a lower debt to equity ratio for a company are favorited by investors and shareholders. It is safe to say that The Cardiff property PLC does not have much funding form lenders but rather are mainly funded by shareholders, the low ratio signifies a very successful business as almost no debt is present, as seen I figure 4.0. Thus, once my peer and I understood this this concept was allot easier to interpret. The other financial structure ratios being the equity ratio was also very simplistic to analyse. This ratio basically outlines how successful the company is as it states the firm’s assets which are financed by the equity investors. Because the firm is mainly based on assets and equity it is no surprise to see how large the equity ratio is.

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Figure 4.0 The Cardiff Property PLC – Financial Structure Ratios

Market Ratios

I did encounter some setbacks when I began to calculate the market ratios as I could not find the relevant information related to the calculations. After heading back into The Cardiff property PLC’s annual reports, I was able to find the amount of ordinary shares placed between the years of 2017 to 2014, yet I couldn’t find the Market prices of shares as easily. The price given on the website for the company didn’t look right to me, so I checked the last time the home page of the website was re-updated and found that I hadn’t been since 2014. knowing this price of $1035 per share was only set for 2014 it opted me in having to research the information on the United Kingdom stock exchange. After doing all the calculations to find the current market price share for 2017 through to 2014 I was very pleased when I realised that my initial “investigation” skills paid off as the price for 2014’s market matched up to the price presented on the out of date website of the company.

After finding the information I needed, I began calculating the earnings per share (EPS) and whilst doing so I kept thinking that the EPS is the value of equity that shareholders receive for each share that is owned. But after double guessing myself I realised that this can’t be the case, as it is the dividends that is received by equity shareholders, so the what has me wondering, what does the EPS ratio mean? Doing some research, I found that the EPS ratio is linked to the amount of profit every share is making and is not the amount assigned to equity shareholders. To my understanding a high dollar value in this section would show a firm’s profitability. Thus, as can be seen in figure 5.0 the dollar value seems quite small but in comparison to my peers values it is a massive jump in value, showing the company’s high rates in profitability once again.

Moving on to dividends per share (DPS) I found that this ratio can tell a shareholder about a firms past and present financial stability. An example of this occurs with one of my peers DPS, his company had a DPS of 58 cents in 2016, but in 2017 the company did not pay out a dividend to its shareholders. This is not a good sign to investors as it shows that the company may been in financially unstable a cannot endure the current market. Thus, my peers company having a decrease in DPS, causes investors to sell tier current shareholdings which in return drives the market value down for the company. It’s good to see that The Cardiff property PLC has a high DPS as the market value will only rise as investors are buying more shares which shows that the company is financially stable.

The last ratio presented in this section is the Price Earnings (PE). To my interpretation from research, this ratio is a measure of the share price in relation to the gross annual income made by the firm per share. The ratio displays the present-day demand for a company share in regard to high and low-Price Earnings ratios. As seen in figure 5.0 the PE ratio for The Cardiff Property PLC, the high PE ratio indicates the high demand for the shares as shareholders expect earnings to grow in the future. A low PE ratio would have the opposite affect form shareholders.

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Figure 5.0 The Cardiff Property PLC – Market Ratios

Ratios based on reformulated financial statements

Figure 6.0 The Cardiff Property PLC – Ratios based on reformulated financial statements

Heading into the ‘ratios based on reformulated financial statements’ I found the calculations really easy to complete simply due to Maria Tyler’s help of reminding everyone to label important parts of the restated financial statements with certain acronyms. The opening ratio to analyse consists of the Return on Equity (ROE), which is related to the implementation of how a firm utilises the shareholders equity in order to produce income. Thus, as can be seen in figure 6.0 above, in 2017 The Cardiff Property PLC was generating 12.36% for every dollar of shareholders’ equity. However, research has shown me that companies tend to manipulate this particular ratio in order to mark the value as more “appealing” that what is actually is for possible investors, I think this is evident in 2014’s ratio as I know this year was not as successful as the future ones. Thus, this leads to the next ratio analysis being the Return on Net Operating Assets (RNOA), which tends to remove this manipulation of ratios problem by aiming at the company’s operating assets.

The RNOA is a much better way in discerning how well a firm is performing as compared to the ROE, as it reveals a company’s management of utilising their assets in an economical way to increase values or if the firm’s performance is poor. As can be seen in figure 6.0, 2017 and 2016’s RNOA were quite high, this demonstrates a strong source of income for the company in those years. This means that the Cardiff Property PLC was gaining additional profit out of the operating assets for these two years. However, it can be noticed that in 2015 and 2014 these ratios where not as high. This leads to the idea that the company may have had sold some of their large quantity of operating assets, hence the increase in 2016 and 2017. This strategy is to some degree, looked upon as bad business as selling assets just to increase ratios can lead the company towards a downward spiral. It can be argued however that the Cardiff Property PLC, having mainly associated in assets, only sold small amounts of current assets to boost the ratios and in doing so will not harm the business in anyway as can be seen in company’s financial statements the business is growing more and more each year.

Moving on to the Net Borrowing Cost (NBC), I interpreted this ratio as the cost of the debt associated within in a firm, as well as the interest rate paid towards a firm’s financing. The Cardiff Property PLC’s, NBC is drastically low for all years as evident in figure 6.0. this is because of the fact the company does not have any outstanding debts and is mainly focused

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on the use of assets and the stock market. It can also be evaluated that the company was generating financial revenue by means of utilising the assets that where not currently required to continue the business. This is very similar to the company’s RNOA due to the company having NFI (Net Financial Income) and NFA (Net Financial Assets) rather than NFE (Net Financial Expenses) and NFO (Net Financial Obligations). It is very clear that the small number of percentages for all years is due the the small amounts of liabilities present in the company, my only thoughts where what my peers NBC ratios would look like in comparison to mine. After reviewing one of my peer’s ratios, it was evident that their company was borrowing significant amounts from creditors as their NBC ratio was very high as compare to mine. This is because my peers company is in the process of expanding the business where loans where taken out to complete the new developments resulting in high debt amount and NBC ratios.

Next is the profit margin (PM), assisting the Cardiff Property PLC’s profitability by concentrating on the firms operating activities and transferring revenue amounts into profit when expenditures are resolved. Again, the company almost being mainly set on operating incomes, it is to no surprise to see these high ratios in the figure 6.0. I decided to compare the PM with the Net Profit Margin (NPM) as seen below in figure 6.1. As can be seen In figures 6.0 and 6.1 The Cardiff Property PLC was generating more revenue with the NPM that the PM. This is because the company NPM is based on sales of property, assets and as well as benefiting from the stock market. The company’s PM which is based on operating activities is also generating income but not as equivalent to the NPM as the operating activities are not being utilised every day for the company does not need to as it is a property investment firm and not a warehouse/factory where operating activities are being used day to day.

Figure 6.1 NPM

Focusing on Asset Turnover (ATO) which is dependent on operating assets, I was surprised to see that the ATO was higher than the Total Asset Turnover ratio(TATO), as this is implying that the company is not producing a substantial volume of revenue from their operating assets. However, as seen in figure 6.2 below I realised that the TATO includes both operating and financial activities. Now realising this it is obvious that the ATO will have a higher number as the company has more positive operating assets whilst the financial activities are negative (as can be seen in the financial statements), bringing the TATO ratio down. It can also be concluded that because the company is a property investment firm, it does not need to have the ATO or the TATO ratio to be high as it does not sell property’s every day, thus is the reason for the small ratios.

Figure 6.2 TATO

Economic Profit

Figure 7.0 The Cardiff Property PLC – Economic profit

After completing the ratio analysis for the Cardiff Property PLC, I was left to complete the economic profit. To be honest I couldn’t remember what the economic profit signifies or what the ratio means as seen above in figure 7.0. Frankly, I went back to the chapter 4 study

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guide to once again to grasp the concept and understating of economic profit. Re-reading this chapter a second time it is very clear that I did not comprehend the concept as well as I thought. From my new developed understanding, the economic profit is based on the opportunity cost of the capital investment, which is the result from the cost of capital, RNOA and the NOA. When I calculated this ratio is used 10% for the WACC (Weighted Average Cost of Capital) because the company did not state the cost of capital in the annual reports.

As evident from the restated financial statements and the previous calculated ratios above, it has come to my understanding that the main drivers for The Cardiff Property PLC’s economic profit is to some degree increasing each year from 2015 to 2017. The ‘drivers’ that are increasing the firms economic profit is based on the company’s NPM, WACC, RNOA, NOA, OI (operating income) and even the days of inventory (DOI). The ATO does not appear to have a drastic effect on the economic profit as sales are not occurring frequently the ratio is very small. I came to the decision to apply these drivers to the successes of the economic profit by comparing the diverse characteristics through the four years being analysed. An obvious observation of 2015’s economic profit is that it is not placed in the thousands category but rather in the hundredths. This difference occurs due the company’s NPM and DOI, as in 2015 the NPM being the lowest of all years and the DOI being the highest. This means 2015 was the worst year for selling property as evident in the DOI it took a long time for the company to have a sale or investment. The NPM is derived from both the operating and financial activities as well as sales, thus also stating the company’s lack of sales in 2015 as evident in the NPM. However, it must be noted that the low NPM and high DOI did not have effect on the company’s overall revenue for that year, as every year the total revenue is increasing as evident in the restated financial statement.

It is very clear in figure 7.0 that in all years the company’s economic profit is positive. This is due to the positive yields of the company’s operations, being more property to invest in, increasing stock market for shareholders and the increase in operating income (OI). However, this can also be related to the company’s increase of economic profit occurring from 2015 to 2017. Because the Economic profit ratio calculates the quantity of income, received from selling certain products and in this case, property, it exceeds the company’s opportunity costs acquired from utilising their resources and services to sell/invest in the property they offer. This is due to the fact that from 2015 to 2017 the shareholdings market for the Thames valley area in which the company invests in, increases each year and in return allows the firm to charge more for their selling properties, which is why each year the company benefits substantially from revenue, hence why the economic profit is so large for each year. Furthermore, this fact can also be applied to the ratios for the reason being that most of the ratios are increasing yearly because of how well the company is benefiting from their current market. It is very much like a ripple effect for as I also look upon my peer’s economic profits and ratios, it is very clear that if the company is failing or incomes are in the negatives, the ratios and economic profits tend to fall as well. Likewise, if the company is succeeding substantially as The Cardiff Property PLC is and incomes are increasing each year, it is obvious that the ratios and economics profits will increase as well. Thus, it can be concluded that The Cardiff property PLC’s economic profit can be expected to increase at a yearly rate if the Thames Valley area stays at high demand in the shareholdings market as it is today.

Step 9:

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Excel Ratio Spreadsheet link + entire financial/restated statements + NVP and IRR calculationshttps://jpaccounting.files.wordpress.com/2018/06/the-cardiff-property-spreadsheet-2018.xls

The Cardiff Property PLC is currently deciding if they want to go through with investing in an area other than their current, being the Thames valley. The area the firm is interested in is the Surrey area as they believe it will help in continual growth for the company’s property investment market. The Surrey area, also being located in the UK, is allot smaller than the Thames Valley area, however after doing some research it is clear as to why the company wants to invest in the area, as the market for the surrey area has been increasing steadily for the last 5 years. Because the company is interested to invest in a new area, the company needs to have a set foundation where the business can run fluently. Thus, the company must invest in building and managing a firm in the Surrey area. Without it, the company will not be able to communicate efficiently with customers or be able to manage the business in the Surrey area. Therefore, the two investment opportunities for this section will rely on investment of the Surrey area and the building/ management of the firm.

For the first investment opportunity (Investment in Surrey area), investing in a new area is very expensive, as many factors must be analysed to ensure the company is not spending money where they should not be. The price associated with investing in the Surrey area is 18 million, with a life expectancy of more than ten years. Because the investment of an area has a distinct stock market, the value for property within the market can either increase dramatically as evident in the Thames Valley area or it can decrease, dropping the price for property. However as stated by the Cardiff Property PLC’s annual reports it is estimated to increase yearly at a steady rate, thus the residual value for the Investment in the surrey area after the ten-year period is 3.5 million.

The second investment opportunity (Building a firm in Surrey area), involves the building and managing of a firm in the Surrey area. The cost of building the firm in this area is 5 million pounds whilst the managing of equipment will add another million pounds to the original cost (6 million). The life expectancy is also ten years as the frim must produce sells equivalent to the initial investment years as the first investment opportunity. Ideally the frim wants to make as much profit as possible from the Surrey area after 10 years, similarly to the Thames valley area. Thus, the frim must have a solid foundation for the company and having a found managing of the company’s equipment and staff, as well has managing the current market for the are as it is increasing slightly each year. Thus, the residual value of this investment opportunity after the ten-year mark is 800,000 pounds.

Both of the investment opportunities estimated future cash flow falls in the services category for the business, as they are providing property and customer service. In saying this, other operational expenses must be accounted for when estimating the future cash flows, such as staff salaries and insurances. Grounded by the research of the stock market in the Surrey area, as well as the Thames Valley area, it is expected that a substantial rise in cash flows will occur as each year progresses. It is also expected that in some years the amount will remain the same nut will begin to increase slowly as evident from the current stock market of the Surrey area.

As can be seen in the table below I have expressed the original cost, the estimated value, the residual value and the future expected cash flows, these numbers are expressed in UK Pounds as well, and I applied the discounted rate/WACC of 10% to my calculations. The estimated

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future cash flows were analysed by the information provided on The Cardiff Property PLC’s current cash flow, I also determined these costs with the help of the ongoing stock market in the Surrey area.

As it can be seen in the table above, I have taken this data and to conduct several calculations in order to determine which of the two investment decisions are of most value to the company. The first calculation being the Net Present Value (NPV), is the comparison of the current value of cash inflows associated with the current value of cash outflows, over a set period of time. NPV is very useful for analysing the possible profitability of a certain proposed investment. The second calculation consists of the internal rate of return (IRR), which provides a percentage on the anticipated rate of return of the original investment cost whilst cogitating the value of the future cash flow. The final calculation consists of the payback period, which demonstrates the recovering time of an investment.

Investment opportunities results:

First Investment Opportunity – Investment in Surrey area

NPV: As evident from the calculated results below, it is expected that an amount of £9,764,831.60 would be received exceeding the original investment cost.

IRR: Based on the calculated results below, the first investment opportunity has an IRR of 20.09% which indicates that this investment would yield a positive profit throughout the years.

Payback Period: In order to recover the costs for this investment in the Surrey area, it will take roughly 4 years and 6 months

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Second Investment Opportunity – Building a firm in Surrey area

NPV: As evident from the calculated results below, it is expected that an amount of £446,734.52 would be received exceeding the original investment cost.

IRR: Based on the calculated results below, the second investment opportunity has an IRR of 11.46% which indicates that this investment would yield a positive profit throughout the years.

Payback Period: In order to recover the costs for this investment in the Surrey area, it will take roughly 6 years and 6 months

Investment opportunity decision

As evident in the above calculations, both the investment opportunities acquired positive results, including the NVP which had well distinguished costs exceeding the initial investment amount. The IRR and the payback period assimilated a variance of 20.09%, 4 years and 6 months for the first investment and 11.46%, 6 years and 6 months for the second. That being said all the calculations will have an important aspect when determining which investment opportunity is the best for the company. Thus, based on these calculations, it is apparent that the best investment decision is the first investment opportunity, the investment in the Surrey area. This investment opportunity is potentially the most profitable out of the two supposing that the anticipated cash flows are accurate. I was expecting that the NVP for the first investment opportunity being £9,764,831.60 would be higher than the second opportunity being £446,734.52 as the initial investment is a lot greater. This is due to the residual value and the returned castle yielding a higher result as compared to the second. Not to mention that the payback period is only 4 years and 6 months it will be a more profitable investment in the early future, rather than the late future as the second opportunity showcases. To my interpretation NVP is very much like they are saying “input, output” meaning what you put in now will only benefit you later. This is evident in the first investment opportunity as the NVP is a lot more substantial than the second opportunity.

However, as can be evaluated, the second opportunity clearly has less benefits and successes as the first opportunity, Yet I believe that both investment opportunities need to be included in the decision as this will maximise the firms benefits as the move into the new Surrey area for property investment. Without both deciding on both investment decisions I believe that it

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will be very pointless to even invest in the new area, as providing services of property to customers will prove to be difficult without a set facility or firm. It will be very impractical for the business to run an in a new established area with no foundation or place where customers can go to. This will prove to have massive negative effect on the company’s revenues as no customers would show interest to the company as they simply do not know it’s there, resulting in no further investments in property. I will argue however that in today’s era everything being placed on social media it is possible to advertise your company that way instead of building a firm, yet The Cardiff Property PLC does not seem to have any form of social media, so I will have to rule this argument out. Thus, it is clear that the first investment opportunity decision will be the most beneficial to the frim BUT will have no effect unless both of the investment opportunity decisions are acted upon as one can’t live without the other. Therefore, if the Cardiff Property PLC decided to go through with investing in the Surrey are and agrees to take forward both of these investment opportunities, it is with doubt that the company will benefit even more than what they currently are given that the expected market for the surrey are is said to increase every year.

Step 10:

Feedback From: Jovan Pienaar

Feedback To: Wendy konstas

My CommentsStep 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

I can clearly see that you have identified your 3 products which are made more relatable with your choice of photos. Your estimations are also very justifiable, and you have described your assumptions clearly, the only thing I would bring to the table for improvement is a simple explanation as to why 10% of the variable cost was chosen. Your commentary of the contribution margin was very well detailed. And overall very well written!

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

Inspecting your ratios calculations, I believe they are correct, as I see you have utilised your formulas well. I did some checking of some of your calculations for RNOA and they add up, so well done! Your commentary for your ratios are very in-depth/well-written and it shows that you have a clear sense of knowledge how these ratios have impact on your firm.The only improvement for the commentary, and this is knit picking, if you applied your sense of

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knowledge of your company more to your reasoning as to why your firm had decreases in the past years due to the company’s mistakes/misjudgements, ETC.Overall your effort for this big step is amazing!

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

It is clear to me that you have definitely thought about your two potential investment opportunity decisions relevant to your firm. With regards to your spreadsheet however, I can see that you have included the residual value which is good. But to further benefit this estimation you could discuss why the residual value are apparent to your firm.Your calculations are definitely correct and are easy to follow.

Step 10

Individual feedback with other students

Your feedback to others are very intuitive and helpful as it is obvious that your knowledge on these concepts make it easier for others to understand when you explain them. Your assistance you provide is fantastic!

Overall ASS#2

Overall Feedback

Additional Notes / Questions

Overall it is very clear that you have completed these steps to a very high standard and you should defiantly be proud of yourself! Your hard work has helped many others and me as well as you have explained the concepts in this task with ease.

Feedback From: Jovan Pienaar

Feedback To: Pia Brown

My CommentsStep 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

Your three products are very easy to identify and understand as it is aided by the pictures you provided. Personally, I would also include the calculation you used to obtain your contribution margin in your commentary Your commentary of the possible constraints your firm may face was very in-depth and assisted me in finding some of my company’s constraints. Overall, I believe that your step 7 is very intuitive and helpful.

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Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

As evident in from your calculations I believe they are in fact correct as I have done some checking myself as well as a few other peers. Your commentary relating to the economic profit and ratios were outstanding. This showed me your knowledge of how you were able to relate the ratios to your firm. This particular step asked the question of “How do your firm’s ratios differ to the ratios of firms of other students”. You answered this question at a satisfactory level and I believe this can be improved by providing further comparisons with more detail when discussing the comparisons to your firm.As a whole, I believe that you have done a genuinely good job as it was evident you showed a real insight into your firm with professional background knowledge and information available.

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

The outline and capital investments in relation to your firm was easily understood and it was clearly written and allowed meaning to be easily made. From observation, your calculations (NPV & IRR) all looked correct. If I could provide my own personal feedback to you it would only a minor issue. I believe that the design and layout of your spread sheet can be improved, this was only minor, however if it was changed it would allow the various calculations to be viewed more easily.As a whole, your discussion was suitable in relation to the recommended investment and interesting to read.

Step 10

Individual feedback with other students

The feedback I was able to locate showed me that you gave other peers helpful and in-depth recommendations and evaluation to help improve their understanding of the concepts.

Overall ASS#2

Overall Feedback

Additional Notes / Questions

The personal feedback that I would provide back to you is that overall your assignment was an interesting read, completed with detail that clearly showed your understanding of the concepts within your firm. With an overall great effort, it was evident that a lot of time went into your work, which was great to see. With only a few minor changes being made, I believe your work cans be made even more superb than what it already is seen to be. Overall, I would just like to say that your hard work has payed of!

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Feedback From: Jovan Pienaar

Feedback To: Tracey Allen – Walters

My CommentsStep 7

Identify three products or services of your firm

Estimate selling price, variable cost & CM

Commentary – contribution margins

Constraints – identify & commentary

The three products that were displayed were easily understood and displayed well. It was evident that your choice in products was planned out in order for the reader to understand your work. Within this step, the information provided was presented with thought and clear knowledge of the concepts. Your paragraphs flow nicely which makes interpretation a lot easier. Your calculations are correct which is always good to see, and your commentary is very sufficient and well detailed.

Step 8

Calculation of ratios

Ratios – commentary (blog)

Calculate economic profit

Commentary – drivers of economic profit (blog)

I have gone through your calculations for the ratios and I can agree with others that your calculations are correct!Your commentary of your ratios was also very well detailed and very interesting. Although I can’t seem to find any correlation to viewing your peers work and comparing it to yours as it will help you see how other firms operate. I would also outline any difficulties or problems you had when calculating your ratios.Your ratio calculations seem to be correct! Overall you did an outstanding job in your step 8!

Step 9

Develop capital investment decision for your firm

Calculation of payback period, NPV & IRR

Recommendation & discussion

The capital investment decisions were clear and well written, they were also very enticing. I was happy to see that you too chose both investments options as means to gain the most revenue for the firm. Your calculations look correct!The discussion on why both investments are undertaken need to be elaborated a bit more but overall, I believe you have done a sound job.

Step 10

Individual feedback with other

The feedback you presented to others was attentive with detailed. Your knowledge on the concepts was evident within the responses given to other peers.

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students

Overall ASS#2

Overall Feedback

Additional Notes / Questions

Overall, I believe that you have done a great job. Your assignment was written in depth and the knowledge you had was clear and easy to understand. Your hard work and effort is definitely recognised within this assignment, this will be evident in your marks I’m sure! I believe that you should be proud of what you have been able to produce. Great effort!

I must say that I have learnt quite a lot this term and especially in this subject, my goes off to Martin Turner for all the work and effort he puts in to these tasks and a special thanks to Maria Tyler for her amazingly helpful video presentations. However, I do believe that a huge vital part is definitely the feedback given to one another with regards to our assignments. The feedback I received was almost helpful every time, as it highlights key areas where I have either done wrong or can improve on which is a massive help. Without my peers help and given feedback I’d be stuck on many parts so I strongly believe that the feedback and the online interaction for this subject is a very intuitive way to engage everyone to learn as a group rather than individuals.